Trading fast and thinking slow: Thinking outside the herd to give you the edge

In this series of three posts, behavioural psychologist Paul Davies opens the bonnet on our personal trading engine—our brain—to uncover the secrets of how we act as individuals, how groups trade and how we can implement strategies for better trading.

In US history, James Marshall is a name forever linked to the story of the Californian Gold Rush.

Deciding to move from his hometown of New Jersey, in 1844 Marshall rode the wagon train west to California with the ambition to make his fortune. After being embroiled in the failed revolt to seize California as an independent republic, he retreated to part-owning a sawmill along the American River. In 1848, when cleaning the mill’s outlet to the river, he saw several sparkling pebbles in the gravel bed and in doing so, became the first person to discover gold in California. News of Marshall’s discovery spread fast, prompting over 300,000 people to rush to the American River, and inspiring 75% of all men across California to give up their jobs to become gold prospectors.

The interesting question is who made money during the gold rush? Marshall himself didn’t profit from his discovery, as he was unable to gain legal rights over minerals found on the land and, when all his mill workers gave up their jobs to find their own gold, he quickly went out of business. In contrast, the characters who benefitted were people like Sam Brannan, owner of the local provisions store. When Marshall visited Brannan’s store with his news of gold, Brannan’s first reaction was not to join the herd searching for the glittering prize, but instead buy up all the pans, picks and shovels he could find and sell them to the precipitous prospectors. Astutely predicting the rise in demand for such items, the price of a shovel rose from 20 cents to $15 and, in just nine weeks, Brannan made over $36,000 (the equivalent today of $950,000) and went on to become California’s first millionaire.

An important part of our development as social creatures is our inclination to imitate, herd and follow others. Much like the famous scene from Monty Python’s Life of Brian, we all like to think we’re individuals but in reality we’re more comfortable when part of group of like-minded souls. The 1955 experiment which kicked-off this research was when social psychologist, Soloman Asch, presented a set of three lines to participants and asked which one was the same length as the standard line.

When choosing individually, it proved a straightforward task, but when asked to choose in a line-up of other participants (stooges in on the experiment), all of whom selected a blatantly incorrect line, more often than not the main participant overrode their knowledge and agreed with the others.