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It was my 10th grade English teacher who introduced me to a slew of famous social experiments, most of which are centric on obedience, authority, and conformity. Stanley Milgrim, Asch, the Stanford Prison Experiment, etc., are all extremely well-known but seem to have done nothing to change actual behavior of the masses because, well, you simply cannot change what is hard coded into our DNA. Over time, they have become much more akin to a diagnosis of what has already occurred.

There is a reason why, as we get older, more of us tend to say things like “the world is going to hell”. We are programmed from a young age to conform to certain norms, many of which change through our lifetimes. The world moves faster than we do, and every generation sees a modification of the one before it.

Both authority and conformity play a role in investing of any type.

I saw someone quoting Peter Thiel the other day, essentially praising him because of his continual investments in FAANG stocks when everyone else said they were overhyped, expensive, and likely to fail. We love a good non-conformist story when it works out. Of course had he been wrong, I never would have read that quote as it would not have been posted. Michael Burry, George Soros, etc. No one would know who these people were had they been staunch conformists. And yes, many of them are one-trick ponies, meaning their actions were one-offs and they really are no different than anyone else on this planet.

There is a never-ending list of these types of stories. And we study them, arguably too much, because the ultimate path taken was simply the opposite of the crowd. This behavior is typically recognized as admirable, because deep down, we know how hard this is to do.

These days, we live in what many describe as a very divisive and tense society. I still “blame” social media for this, for a very simple reason: people are persuaded and live by the rules of their peers vs. an authoritative figure with no direct impact on their lives. Peers provide people with a cushion/comfort/an “army”/backing/validity.

Social acceptance is absolutely massive to us, and our actions to achieve this are deep-rooted in our brains. Major news networks, or any other ideal-leaning publication is incapable of doing this. But the crowd does this very easily. Social media gives people the venue at-scale to achieve this, not present before.

This is not to say any authoritative figure is incapable of persuasion. Quite the opposite. But the effects are typically far shorter-lived and far less-likely to trigger deep-rooted actions on behalf of the “subject”.

And as people pick their sides and find their respective communities, the end result is a very, very high contrast scenario. Things become “ultra-divisive” because all sides have become locked in by a way of thinking, backed by an enormous community of peers.

Two people looking at the same picture will see two completely different things because they enter with a preconceived notion of what that image is.

These days I live in the suburbs. Many of my older neighbors rely on an app called Nextdoor to communicate about well, just about everything. And like every other social media app out there, each and every day things get tense and people start arguing about one thing or another. Most people would place these fights in the political bucket, but not always. It is almost shocking because you see the actions of their day to day lives, and yet you observe how “strong” their words seem, shaped by their online communities. To most people, it doesn't add up. But to those familiar with most of the experiments on this list, it makes perfect sense.

The “Best” Positioning Arrives from Conformity, I Mean, Non-Conformity, I Mean,….

So what's the point, you ask…

Trading is weird, because it is the only profession I know of which teaches non-conformity from the get-go. And while you might think this would lead to instant success, the inverse tends to be true. If everyone is non-conforming and buying a low, then it turns out they are in fact conforming, and ultimately get ripped to shreds in an aggressive trend downward.

So the people who think they are not conforming are in fact conforming by extension of overall agreement of non-conformity. Whoops. Don't go crazy on me just yet…..

Let's look at a hypothetical “holy grail” example:

The market is trading higher. Delta (executions) are bullish. The order book is bullish. A level is hit. The trader executes short. Suddenly, those bullish executions turn bearish. The order book becomes bearish. Price drops. All of this occurs at or after the moment of execution. The trader profits a tremendous amount of money.

This trader has just done “the impossible” by calling the direction prior to any confirmation. He decided to be a non-conformist, and it paid off. If he posted the trade to a platform like Twitter, he would be getting thousands of likes and praise from the community.

Now let's look at a worst case scenario:

The market is trading higher. Delta (executions) are bullish. The order book is bullish. A level is hit. The trader executes short. Suddenly, those bullish executions turn even more bullish. The order book becomes further bullish. Price increases. All of this occurs at or after the moment of execution. The trader loses a tremendous amount of money.

The trader has just done “the normal” by getting mowed down in an aggressive trend. He decided to be a non-conformist, and he got slaughtered as a result. If he posted the trade to a platform like Twitter, he would be getting ridiculed, laughed at, and retweeted for his shameful behavior.

In both scenarios, the same action led to very different results. Toss in the social impact, and the euphoric or devastating nature just compounds. Some people can deal with this somewhat well, but most cannot. Again, we are creatures of social acceptance.

It is not my goal today to dive into trade specifics but merely highlight the fact that trading involves somewhat of a double-edged sword, and it is perhaps one of the most unnatural things we can attempt to implement.

Take trend trading for example. I call this divergent trading, because we are essentially going with the path of least resistance, whether it points towards a mean, or not. When we “mess up”, one of the first things we do is attempt to change our subsequent behavior.

In divergent trading, we are moving with momentum. Going with the crowd, not against it. Conforming. In the case of the second trader above, based on his unsuccessful actions, may start executing long or short based on an underlying trend. But then he finds himself buying tops and bottoms on a routine basis, making matters even worse. Damned if you do, damned if you don't.

He has failed to see that his actions were in fact largely correct as far as the market and specific environment was concerned. His public ridicule would have likely added to his decision to change his behavior. “Don't upset your peers.”

Trading is double-edged because the vast majority of the time people have to both conform and non-conform, based on the interval.

For example, the market is trading higher. We want to conform to this move, in order to take the path of least resistance. But in order to get profitable positioning, we need to be non-conforming and buy when the market is trading down on a pullback. Shifting gears like this is extremely difficult for us to do. It does not come naturally.

We are essentially saying, “I'm accepting this, but not this”. Once you realize how deeply programmed we are to accept certain outcomes, you will also realize why this action makes zero sense on the whole. But it is what's necessary to keep on moving forward and maintaining (literal) positive equity.

It's a clumsy process and usually takes many years of conditioning in order to achieve. Mechanical knowledge can only assist us in so many ways. This is why the “execution” skill of trading is so unique. It relies on a process which both agrees and disagrees with the crowd. And naturally, we only go on one side or the other.

Twitter, FB, LinkedIn for the Conformity Win

Many of you reading this today clicked a link on social media in order to get here. In THAT world, we are flooded with both conformists and non-conformists, but rarely those who split the two. I joked the other day with a friend and said “what is this CNBC?” when he asked for an armageddon-style price target. Analysts are the most common types of guests on those networks, and analysts love to give exorbitant price targets.

They are almost always late to the party, but rightly so. Their job is to proclaim to the public their position on a stock, future, currency, or crypto, so they tend to take the most socially acceptable route. They wait until slowly but surely, most of their peers head in that direction, then “call the shot”. Of course by this time, it can be too late. They waited for social acceptance and reacted to that vs. what was likely very bluntly staring them in the face months prior.

Analysts are of course at the center of conformity. On social media, we are driven to do the same. Whether we realize it or not, we are constantly being funneled in one direction or another, our opinions becoming stronger based on preconceived notions (usually “planted” there by a group of peers). I never want to imply any of this is good or bad, either, but simply is what it is.

All of these topics are covered in the documentary posted below. It's from Russia, and yes, it's old. The entire video is about conformity and cycles back to the Asch Conformity study completed in 1951. And also yes, I found this through social media. It does have its positive traits.

This stuff always interests me not just for trading, but for about everything else in life (especially these days). I feel as though the older I am, the more independent I become, but that opinionated “pull” never seems to vanish out of sight. Creatures of habit.