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In contrast, the amygdala system cannot understand high-level concepts such as cost. The concepts of cost, benefit, investment, etc. are relatively recent developments in human history and are processed by the new cortex of our brain. This region of the brain is responsible for planning, logical deduction, and executing plans. It helps us weigh whether it's better to eat a piece of candy now or lend the candy to someone else and earn interest. This region is suitable for thinking about investment decisions.
Thus, it is apparent that if similar information is intentionally presented in different ways, our brains can easily be deceived. Furthermore, different parts of the brain exhibit varying preferences when processing information. Financial media, large investment banks, and securities companies are well aware of the impact that certain words have on investors. For example, during the Shanghai Composite Index's peak in 2008, investment institutions heavily emphasized value investment, regular investment for wealth, and asset allocation, all of which belong to the cost category of information. Investors exposed to this information for extended periods naturally become less sensitive to risk, ultimately leading to significant losses when the index collapsed. Unscrupulous financial practitioners exploit these cognitive loopholes to deceive investors into buying unnecessary projects, resulting in many individuals losing their fortunes. Some even refer to this as "neuromarketing," an academic field that studies the "buy button" in the human brain.
When making decisions, humans typically consider not only the information they have gathered but also the actions of others, particularly when a group is involved. Herd behavior, which is a well-established area of group psychology, suggests that individuals tend to follow the crowd's decisions for psychological comfort, regardless of their background. Recent studies in cognitive psychology have proposed a new perspective on herd behavior, suggesting that our subjective views are based on the information we receive. When faced with the decision of whether to follow the crowd, we subconsciously assume that the public possesses more information, which we believe correlates with making the best decision. Consequently, we tend to view following the crowd as a suboptimal decision.
Professor Bok's theory of information cascades provides a vivid explanation for this phenomenon. The theory originates from a story about a town with 50 people, where one person brought an umbrella to work because theirs was broken. Another person saw someone with an umbrella on the street and inferred that it might rain, so they also brought an umbrella. The third person saw two people with umbrellas and did the same, and so on until the 50th person saw 49 people with umbrellas and concluded that it must be raining, so they also brought an umbrella.
The main reason for this phenomenon is that the first person couldn't transmit their information to others, so people could only infer their intention based on their behavior. This is similar to the situation in financial markets where we can only see other people's buying and selling behavior without knowing their reasons. Sometimes, meaningless information can be amplified through group behavior and become a consensus that ultimately influences the behavior of the whole group.
The story about information cascades raises a number of interesting questions. One of them is when does the public shift their thinking from the possibility of rain to the certainty of rain? Additionally, how does the sight of an entire street full of people with umbrellas influence the decision of the first person who brought an umbrella?
This phenomenon is not limited to weather patterns, as asset price fluctuations in financial markets often conform to the information cascade model. An institutional investor making a simple asset allocation adjustment can quickly escalate into a panic-driven sell-off due to mimetic/>/>/>/>/>/>