The Online Investing AI Blog

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As the maker of Automated Trading financial systems, we offer a few reasons why computer-based trading can help investors. They operate continually. They edit out emotions. And, they can be programmed for success.

When it comes to trading, it seems that most humans are programmed to lose.

This week, we’ll take a look at the ways you and I can be programmed to lose, especially when it comes to trading decisions.

In today’s post, we’ll take a look at social proof, a psychological theory, that may exert a powerful influence on unsuccessful trading strategies. Social proof is nothing more than “follow the leader,” except, in this case, no one knows who the leader is. And no one knows why the leader is the leader.

Here’s how it works.

In social proof, we look around to others–our family members and peers–to validate our decisions. The higher the influence of the peer or peer group, the more intense the social proof. Companies do this all the time by paying celebrities and teams to be spokespeople for their products.

It sells a lot of shoes.

But, when social proof drives stock purchases it leads to bubble buying and popping. As an example, your friend mentions she’s buying Apple stock. Then, the CNBC team does an expose on Apple’s success. Finally, you read an investment guru’s positive assessment.

You’re in. And you buy the stock. Unfortunately, social proof forces have attracted millions of other buyers who may increase demand to an unsupportable level.

Social proof can pop that bubble, too. Whispers and warnings become confirmations of social proof and investors run for the hills.

Essentially, social proof programs you to buy stocks or assets when they’re high and sell them when they’re low.

While social proof is a powerful program, it’s not the only faulty investment scheme that runs around in our head. Tomorrow, we’ll look at the greed factor.