A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

participants to deliberately give the wrong answer and to do
so before the seventh participant had a chance to express an
opinion. The results were astonishing. The seventh
participant would often give the incorrect answer. Asch

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conjectured that social pressure caused participants to pick
the wrong line even when they knew that their answer was
incorrect.
SAMPLE CARDS USED IN ASCH
EXPERIMENT
Source: Solomon E. Asch, 
Social

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Psychology
 (Oxford, 1987). By
permission of Oxford University
Press, http://www.oup.com.
A 2005 study by Gregory Berns, a neuroscientist, used
MRI scanners to examine the workings of the brain to
determine whether people gave in to the group knowing that
their answers were incorrect or whether their perceptions had
actually changed. If caving in to the group was the result of
social pressure, the study reasoned, one should see changes in
the area of the forebrain involved in monitoring conflicts. But
if the conformity stemmed from actual changes in perception,
one would expect changes in the posterior brain areas
dedicated to vision and spatial perception. In fact, the study
found that when people went along with the group in giving
wrong answers, activity increased in the area of the brain
devoted to spatial awareness. In other words, it appeared that
what other people said actually changed what subjects
believed they saw. It seems that other people’s errors
actually affect how someone perceives the external world.
In another study, social psychologists put a single person

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on a street corner and asked him to look up at an empty sky
for sixty seconds. The psychologists then observed that a
tiny fraction of the pedestrians on the street stopped to see
what the person was looking at, but most simply walked
past. Then the psychologists put five people on the corner
looking at the sky; this time four times as many people
stopped by to gaze at an empty sky. When the psychologists
put fifteen people on the corner looking at the sky, almost
half of the passersby stopped. Increasing the number of
people looking skyward increased the number of gazing
pedestrians even more.
Clearly, the Internet bubble of the 1999–early 2000 period
provides a classic example of incorrect investment judgments
leading people to go mad in herds. Individual investors,
excited by the prospect of huge gains from stocks catering to
the New Economy, got infected with an unreasoning herd
mentality. Word-of-mouth communications from friends at
the golf club, associates at work, and fellow card players
provided a powerful message that great wealth was being
created by the growth of the Internet. Investors then began to
purchase common stocks for no other reason than that prices
were rising and other people were making money, even if the

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price increases could not be justifiable by fundamental
reasons such as the growth of earnings and dividends. As the
economic historian Charles Kindleberger has stated, “There is
nothing so disturbing to one’s well-being and judgment as to
see a friend get rich.” And as Robert Shiller, author of the
best-selling 
Irrational Exuberance
, has noted, the process
feeds on itself in a “positive feedback loop.” The initial price
rise encourages more people to buy, which in turn produces
greater profits and induces a larger and larger group of