Investing has become an integral part of everyday life. Indeed, it has been part of one of the great cultural movements of the century. In 1971 the 10% of U.S. families with the highest income owned 74% of the stock market value.1 Today, nearly everyone owns stocks. Ownership comes from 401 (k) plans, stock ownership plans, mutual funds, and brokerage accounts.

Not only do we own stocks, but we like to talk about them. Investment chatter occurs at the office, over lunch, on the Web, on the radio, at the YMCA—everywhere. Although the 401(k) retirement plan has probably done the most to introduce people to the stock market, it may be the rise of the discount and Internet brokerages that has pushed investment talk into the open. Most people still want some­one to talk to about their investments. In the old days, you developed a relationship with your full-service broker. You bought and sold stocks, and you talked. However, you can't chitchat with your online broker. Therefore, you talk to your coworker, your neighbor, a family member, or strangers on your favorite Web site. This has created an interesting para­dox. You want to invest on your own, but you also want to come to a consensus with like-minded people.

SHARING INVESTMENT KNOWLEDGE

You want help to "do it yourself." Although this help has moved away from the full-service broker, many other avenues have opened. You can check the consensus of finan­cial analysts on your stock by clicking on your favorite Web site. You can also subscribe to an investment newsletter. There has been a huge growth in these newsletters, as evi­denced by the history of the Hulbert Financial Digest, a newsletter that reports the recommendations of the other newsletters. It began following 15 newsletters in 1980, and by the mid-1990s the number had swelled to over 90. This is big business—over 2 million subscribers spend $500 million annually on newsletters.2

Why all this advice? Let's face it, investing is hard. What price should Amazon.com sell for? If its earnings are one penny off the consensus, what should the price of the stock be? Experts in stock valuation use complicated mathematical models to estimate these answers. But even the experts use price ranges, not exact prices. Why? Because valuation is full of uncertainty.

So, if you cannot compute the value , then how do you make investment decisions? People that do not use rigorous quantitative criteria in their decision making often get a feel for the stock value. This feel comes from investment socialization. What do the analysts say about the stock? What does the newsletter say? What does CNBC say? What does my coworker say? This investment socialization turns other investors' opinions into your "facts," and this is what you base your decisions on.

The popular consensus acts like social pressure. How could all those people be wrong? This causes you to doubt your own judg­ment when you disagree with them and to have too much confi­dence in your judgment when you do agree.

MOVING WITH THE HERD

As you learn what other people think about various stocks, the social consensus forms. As you and others act on this consensus, a herd forms. Investor herding is not unlike antelope herding. Antelope stay together in herds for protection against predators. One minute the herd is doing nothing; the next minute the herd is in full gallop. An

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want to be lett behind. You also may be keeping an eye and ear open to what other investors are doing; watching CNBC every day; closely following chat room postings on your favorite Web site; checking your portfo­lio every day. When things start moving, you know about it. You even may let your friends and coworkers know about it. Do you move with the herd (see Figure 7.1)?

Not surprisingly, the feeling of regret that results from picking a loser (Chapter 5) is less severe when you know that many others picked the same loser—misery loves company.

When an antelope sees its herd starting to move, it moves very quickly to join it. This brings up another way in which socialization has had a deleterious effect on the behavior of investors. It stems from the herd mentality and is discussed in the next section.