How Others Can Effect Your Perception of Reality

As you know, one of my favorite topics is decision-making, how people gather information, process it, and make decisions. One of the most interesting articles I have read recently appeared in the New York Times (June 28, 2005, Science Times Section.) It recalled research done 50 years ago by noted psychologist Solomon Asch whose studies showed that people's perception of reality can be influenced by pressure to conform socially.

Dr. Asch asked people in a group questions where the correct answers were very clear. However, he introduced a wild-card factor. Some of the people in the group were shills, actors who were told to deliberately give the wrong answers to the questions. The result was that in three out of four cases, the test subjects agreed with the wrong answers given by the shills!

This flies in the face about what we think about people and the process through which they perceive the world, analyze what they perceive, and make decisions. We believe that people see the world accurately, that they gather and analyze facts, and come to rational conclusions. More to the point, we believe that a group of smart people looking at the same reality would all come to the same conclusion. However, if Dr. Asch were correct, you'd have to question the decisions made under circumstances where people were potentially subject to influences from other people.

Did people know that they were giving the wrong answers? Or did the incorrect information they received from other actually change their perceptions about what was right and what was wrong? Do people have such a predisposition to conform to social pressures that they will go along with the incorrect answers knowing that they are wrong? Alternatively, did social pressure actually change their perceptions of reality?

These questions remained unanswered until recently. Now scientists can use M.R.I. (Magnetic Resonance Imaging) machines to determine which areas of the brain a active when people are engaged in the testing process. Dr. Asch's research has been confirmed recently in a way that gives us even more insight into what happens in the brain under these circumstances.

It turns out that the areas of the brain that are devoted to perception are the same areas that are active when evaluating issues of social conformity. Entirely different areas of the brain are active when making judgments and standing up for one's beliefs. These areas are the same areas that are involved in emotional responses.

When people went along with the incorrect decision, it appeared as if people did not make a conscious decision. The areas of the brain involved in higher order activities were inactive. This suggests the people did not say, "I know what is right but I'll go along with the group." The incorrect decision making did not seem to be rooted in a conscious decision to conform in spite of perceptual recognition of the truth. Rather it suggests that social pressure can actually change peoples' perception of reality.

This is startling evidence in a world where our society is virtually rooted on the concept that people see facts pretty much the same way and they engage in rational processes when evaluating alternatives. It does not mean that they come to the same conclusion, otherwise we wouldn't need elections. But in our democratic society we have come to believe that the majority of people will come up with correct decisions. If we're on the losing side, we may not agree with the outcome, but we have enough faith in the democratic process that we accept loss without resorting to revolution.

What does this have to do with real estate and mortgages? Well, during my entire career I have felt that there was a lot of "crowd behavior" going on. It seems when one person decides it's time to buy a home, a number of others want to buy too. They might have been ready a year before, but their decision to act is based upon conforming to a socially determined desire, not the reality of their situation.

I absolutely believe that times of high mortgage activity are driven not by rational evaluation, but by people seeing all their neighbors refinancing. They see that and they are driven to do so as well.

I also think that people choose popular loans rather than ones that might be best for them. They do the same thing they see others doing around them. An example of this is the frenzy over negative-amortization and interest only loans. Fifty percent of people are choosing these loans, not the right loan for most of them, and some of those people are going to be hurt down the road.

The lesson to be learned here is to distance yourself from the crowd when you have an important decision to make. You want what is best for you, not them, and you don't need to hear potentially negative influences that could come from them. After all, they may all be doing something dumb.

It also may give us a little insight into what might have been at work with the jury in the recent Michael Jackson trial. Two of the jurors who voted for acquittal are now saying they believed he was guilty.

Be careful out there!