In uncertain situations, we often look for social cues about what to do based on what everyone else is doing. This kind of social proof can be highly effective in helping us to navigate what to do in the absence of proper information. In fact, sometimes the effects of social proof can be remarkably powerful, causing the herd to do something dramatic because everyone else is doing it too - even if no one in the crowd actually knows why they're doing it.
Unfortunately, though, the principles of social proof are often used unintentionally, and in fact can be unwittingly applied to encourage negative behavior. Examples include teenagers making irresponsible decisions because their friends are doing it to baby boomers not saving for retirement in part because they think no one else is doing it either.
So it's important to consider the social proof ramifications of any message that is communicated. Otherwise, there's a risk that explaining the commonality of a bad behavior will actually communicate to people that the behavior is socially condoned and that it's therefore permissible.
On the plus side, financial planners are often in a good position to invoke the positive effects of social proof on behalf of their clients. If the normal behavior is bad, we can establish positive role models of what the normal behavior of a good outcome would be instead.
On the other hand, applying social proof with clients also requires us to let go of the idea that absolutely every client scenario is unique, and instead try to identify ways that a client's situation is similar to others to provide a positive social proof context.
The bottom line: Since our brains are hard-wired to create these kinds of comparisons, just ignoring the phenomenon is not an option.
WISDOM OF THE CROWD?
A rather astonishing example of the social proof phenomenon is discussed in Robert Cialdini's book Influence: Science and Practice, which covers a wide range of research on what influences our behavior.
In an incident in Singapore in the 1980s, the customers of a bank began withdrawing their money in a frenzy one day, despite the fact there was no notable news and no apparent reason.
As it turned out, the cause was surprisingly simple: An unexpected bus strike had created an abnormally large crowd waiting at the bus stop in front of the bank. Customers passing by mistook the large bus-stop crowd for bank customers waiting to make a withdrawal. Consequently, they got in line themselves to get their money out, assuming that if there was such a huge line in front of the bank, it must be in trouble. The bank was forced to close its doors to prevent an actual bank run.
The social proof phenomenon is not unique in this regard. It's an underlying cause for a great deal of herd-like behavior, from those irresponsible teens to investors who substitute real due diligence with following the crowd. Even TV laugh tracks are a form of social proof.
Sometimes we apply social proof principles to attempt to influence behavior change, and do so without realizing it. A famous Cialdini study looked at a particular problem in the Arizona Petrified Forest National Park, where many visitors were taking bits of petrified wood as souvenirs. The park posted a warning sign near the entrance to the park: "Your heritage is being vandalized every day by theft losses of petrified wood of 14 tons a year, mostly a small piece at a time."
While the purpose of the message was to discourage theft by highlighting the vandalism, the sign also held a subtle underlying message: It's common practice for visitors to take small pieces of wood as souvenirs.
Cialdini found that when a sign describes what people should do (an injunctive norm), rather than what they are doing (a descriptive norm), it's much more effective in changing behavior. This language was found to be far more effective: "Please don't remove the petrified wood from the park, in order to preserve the natural state of the petrified forest."
Notably, this version does not include a descriptive norm implying that everyone else is already doing the inappropriate behavior; instead, it applies an injunctive norm, emphasizing that the behavior is bad and shouldn't be done.
The principles of social proof apply frequently in financial planning, although we often fail to recognize the scenarios when they occur.
For instance, consider the litany of research indicating that baby boomers (and Americans in general) are ill-prepared for retirement; according to EBRI's Retirement Confidence Survey, 57% of workers report less than $25,000 in total household savings and investments. While financial planners see such a message and lament the dramatic retirement shortfalls, consumers may perceive a very different message: Apparently, most other people haven't figured out how to save much, so I'm not going to either. Or even worse: With $50,000 of retirement savings, I must be doing great.
Statistics that report widespread shortfalls for retirement run a fine line between showing the depth of a retirement crisis, and informing people that having a shortfall is actually a normal behavior - implying with the latter that it doesn't need to be corrected, since apparently no one else is correcting their situation, either.
This suggests that an effective application of social proof to motivate clients should actually steer away from showing them that a severe shortfall is the norm. If the research (and the media coverage) focused instead on statistics like "the average successful retiree had an account balance of $750,000 at retirement," prospective retirees with only $50,000 would realize what a shortfall they really face.
ACCENTUATE THE POSITIVE
If we're going to explain a norm about the behavior of savers that embeds an implication of social proof, we should be using injunctive norms that show what is successful, not descriptive norms that describe the commonality of failure. The same is equally true for statistics and social proof on similar issues: the low national savings rate, the extent to which most Americans are underinsured, etc.
Alternatively, if an undesirable behavior like poor savings habits must be described, the focus should not be on how common it is, but instead on how negative/adverse the behavior is, invoking the injunctive norm.
For some planners, the problem is not that we use bad behaviors as a demonstration of social proof, but that we avoid using social proof at all. In a world where financial planning often emphasizes the customized, individual needs of the client, many planners shy away from providing recommendations or guidance based on what other clients do.
Yet from the client's perspective, that may be exactly what they need to hear. Saying, "What most of our other clients do is ..." can be an excellent way to apply social proof principles to help guide clients down their own path.
That's especially true because if we don't show clients what is normal or right, they may rely on a poor role model for their own social proof, such as trying to keep up with the Joneses. Not playing a role in social proof for our clients doesn't mean that they won't still be using it; we just won't have any influence on whether they're using good norms or bad ones.
The bottom line is that social proof is a reality of how we think, as the research has now well established. Whether desirable or not, clients will constantly be drawing on information around them to come to conclusions about whether they are doing the right thing compared with their peers.
That means it's time that we as planners became more cognizant of what messages we may be unintentionally communicating that could be adversely impacting client behavior - and, ideally, refocus on setting better social proof role models that clients can actually aspire toward.
Michael Kitces, CFP, is a partner and director of research at Pinnacle Advisory Group in Columbia, Md., and publisher of the planning industry blog Nerd's Eye View. Follow him on Twitter at @MichaelKitces.