One of the greatest basketball players in history constrained his success out of concern of what others would think. Gladwell highlights other examples of people making bad decisions due to social norms and peer pressure. Sociologist Richard Thaler told the owners of American football teams - a tight-knit club - that they should recruit college players from the second and third rounds of the annual draft, as they were more cost-effective choices than the highest-rated players in the first round. He also warned that they were paying the equivalent of a 137 per cent interest rate for the privilege of fielding a player this year rather than next. But the tycoons, afraid of what their peers would think, declined to change their ways. The film Moneyball focuses on a similar issue: a statistician realised that baseball scouts were more focused on players' physiques rather than their performances, leading to many being inaccurately priced on the transfer market. Again, most of the team managers refused to alter their strategies. Another case is a penalty shoot-out: footballers rarely shoot directly at the goalkeeper - statistically the most likely way to score - out of fear of looking foolish in front of their teammates and fans. Instead, they save face by shooting to the side of the goal and forcing the keeper to make a diving save.
New Yorker writer Maria Konnikova examines similar behaviours in The Confidence Game, her book about con artists and how they capitalise on human psychology. She zeroes in on "social consensus" - everyone else is doing it - and people's concerns over how they're perceived as common reasons why they fall for scams and act against their better judgement. "We care what (others) think - and what they think can impact how we fare later on."
Investors' decisions and actions are often shaped by the same factors. When a company's share price spikes or crashes, many will assume their peers know something they don't and join the crowd. Even those who've analysed the business in depth are likely to feel a twinge of doubt and fear that they've missed something. The minority who refuse to budge may be shunned and become pariahs - a lonely existence plagued by uncertainty. It takes exceptional self-belief, conviction and a thick skin for investors to remain resolute as they miss out on a big windfall or rack up losses.
Bill Ackman has stood firm for more than three years. In December 2012, the hedge fund manager publicly declared that Herbalife was a pyramid scheme and disclosed a short position in the multi-level marketer of nutritional products. But the company's shares have more than doubled since then, and surged last month after it agreed to pay $200m (£153m) to US regulators and revamp its business to avoid being labelled as a pyramid scheme. Still, Ackman is largely seen as the catalyst for the federal investigation. Another hedge fund manager, Michael Burry, famously bet $1bn that the US housing market would collapse in 2007. Memorably portrayed in The Big Short, he incurred huge losses and sparked an investor revolt before he was proven right. His fund, Scion Capital, made a total return of 489 per cent in less than eight years.
Perhaps the biggest challenge for contrarians is recognising when their decisions cease being driven by the investment case, and become about protecting their ego and avoiding embarrassment. Facts should remain the overriding factors; investors should keep an open mind and welcome criticism, without abandoning their own analysis due to peer pressure. But they shouldn't be afraid to back down and admit fault; pigheadedness is often the enemy of profit, and they can carry the lessons learned to future situations. People may laugh at how you shoot, but it doesn't matter if you keep scoring.
