In a great book “The Risk Wise Investor”, the author, Michael T. Carpenter, writes on ‘social proof’.

“Humans share many biological functions, characteristics, and reactions with other animals. We have many common, deeply ingrained, hard-wired behaviors. Although we don't consider ourselves to be herd animals, we certainly have a lot in common with them. One of the most basic of those behaviors is the fact that humans are very social animals. Although we tend to focus on ourselves and our individual needs a great deal, social interaction, being accepted by and belonging to both small and large groups is a key motivator and driver of human behavior. None of us like to feel like an outsider. We all want to be insiders, and we find attractive advantages to being on the inside of groups. For some animal species, the norm is to live individual, solitary lives. They are almost totally solitary except for very temporary periods of interaction when they mate or rear their offspring. Humans are the exact opposite. We are not at all inclined to live solitary lives. In fact, people who choose to live alone or avoid social interaction are considered to have something wrong with them. They are viewed as being different, weird or antisocial, and are often characterized by the negative term "loner." We call people who don't socialize, antisocial, and that term carries a clearly negative connotation. In fact, socializing is so normal for us that some antisocial behavior is considered a mental illness. Based on a number of studies of the life expectancies of single people, married couples, and extended families living together, living alone also has a negative impact on our very life expectancy. Taken to its most extreme, the form of punishment that is considered even more grievous than death is solitary confinement. People in solitary conditions long enough can even go crazy and literally lose their minds because of lack of interaction with others.

Humans like and need to belong. We gain comfort and validation in conforming to the group. When we are uncertain as to what to do in almost any situation, we will look around and do what everyone else is doing, even when it may not make sense to us. Many bird and fish species exhibit the same behavior when as a defensive behavior they flock or school in the presence of threats. We humans would rather fit in with the crowd and be wrong, than be different and right. A fascinating and amusing example of this basic human need to not be different was demonstrated by the old TV show Candid Camera with Allen Funt, in a segment called "The Elevator." In that segment an unsuspecting individual is faced with the uncomfortable fact that all the others in an elevator (who were all in on the joke) were all facing the back of the elevator rather than facing the front. The big question, and the fun, was watching to see how each victim reacted to the internal conflict between logic (which was to face forward, toward the doors) and the instinct to do what everyone else was doing. What do you think the victims did in that situation? Which factor, logic or instinct, had greater influence in directing the victim's behavior? What do you think you would do in a similar situation? If you bet they would rather fit in with the others and be wrong, than be different from the others and be right, you'd be right.

This basic need to belong, this herding and social validation instinct, is so strong because of the survival advantages it offered to our early ancestors. Just imagine if you were an early human on the hunt with your tribe and you saw the majority of your group running back toward and then by you at full speed, with fear in their eyes, in the direction you had come from earlier in the day. Would you join them in running away and ask questions later or hold your ground to see what they were running from? This instinctual behavior is particularly visible in fashion, apparel, and fads of all sorts. It manifests itself in almost everything we do, including investments. In most of those situations fad and trend following is enjoyable, fun, and works in our favor because it helps us fit in, become part of the group, and stay current with the times. The only risk is that when a new trend or fad emerges we have to shelve our out-of-date items and stock up on the new fad or opt out entirely from participating in fads.

In the investment world a totally different effect occurs. If everyone else already has invested in a company, industry, investment theme, or market, the price has already been driven up by increased demand. As a result, the investment has an attractive and very compelling track record of success. Everyone likes it, is enthusiastic about it, and is making money on the investment. People start talking about it as a money-making machine, and assuming it will never go down in price, which is a fatal misjudgment.”