The Authority Bias

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Here are some not-so-surprising stats.

20% of trades on the stock market are from brokers copying other profitable brokers¹.

60% of traders say they started trading by copying expert online².

But do these financial experts really know more than the rest of us?

That's what Richard Wiseman looked at in his great book, Quirkology.

Investors vs Chimp

Back in 1994, a Swedish newspaper ran a light-hearted experiment.

The newspaper gave $1,250 each to five experienced investors and a chimpanzee named Ola.

The experienced investors used their wisdom and experience to pick the best stocks.

Ola selected stocks by throwing darts at companies listed on the Stockholm Exchange.

Wiseman writes that:

The Wall Street Journal ran a similar test: four investors each pick a stock, while four others are chosen using a dartboard.

After six months, the returns are compared. The dartboard often performs better and almost always beats at least one or two of the experts.

Which begs the question. Why do so many traders still copy others?

Well, it's due to the authority bias.

We feel an urge to follow the actions of high-authority others.

In the book Free Your Mind, Patrick Fagan shares a study on the bias.

It found that letters from a dentist's office saw a 54% return rate when signed by the dentist, but only 18% when signed by the dentist's secretary.

In other words, we heed advice from those in power, which is unfortunate, because often their advice is as good as an ape's.

The authority bias is one of 85 nudges you'll find in the Nudge Vaults.​

In fact, inside the Nudge Vaults you'll find 11 more insights specifically about that bias.

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​Phill​