There are various synonyms for contrarianism, some positive, some neutral, some distinctly negative. Contrarians may be seen as courageous, unconventional, counterintuitive thinkers, able to withstand herding pressures and even abuse from crowd-following conformists.
Others may see them as maverick, out-of-touch, denialists ‘living on another planet’ and unable to see the obvious. Some rejoice in the title while others shun it. It can be a label of both praise and condemnation.
What makes an individual a contrarian? Why are they able to resist pressures to conform? And is this position always desirable? Psychologists and sociologists have been studying these questions for years, but have a radically different take on it.
Sociologists are likely to see contrarian investors as deviants, while psychologists may see them as healthy, ‘independent’ thinkers.
Conformity is defined as the tendency to change one’s beliefs and/or behaviours in ways consistent with the group norm or standard. Put simply, humans tend to conform to the beliefs and behaviours of others. Conformity means yielding to perceived group pressure, even when no direct request or command has been made. In this regard, it is different from compliance, which is doing what others request or ask you to do (even if you prefer not to), and obedience (which is following orders).
There are two famous conformity experiments: the first, Sherif’s 1935 autokinetic effect experiment; the second, Asch’s 1951 line judgement experiment.
The first found that, in ambiguous and unclear situations, most people tend to follow the behaviour of confident and consistent peers. We look to others to enlighten us about what is going on. Think confident financial gurus, uncertain markets and investors wanting some guiding light.
The second identified three types of reaction among participants in an evolving situation: those individuals who remained independent throughout, even if they felt uncomfortable doing so; those who conformed, sometimes quickly; and the third (smallest and quirkiest) group were anti-conformists who were slavish contrarians, doing precisely the opposite of what the group did, and simply conforming to anti-conformity.
The factors identified by these studies as influencing conformity outcomes can be summarised as follows:
• Task difficulty and ambiguity: the more difficult the task, or ambiguous the stimuli, the more participants look to others as a source of information. As such, we might expect that when an economic investment is more complex and unclear, herding is more likely to occur.
• The nature of the stimulus: conformity behaviour varies considerably with the type of judgement people are asked to make: the more factual and clear the problem, the less conformity occurs. Economic data looks objective, factual and numeric, so one might expect less herding when there is an abundance of data points.
• Source certainty: the more certain a person is of the reliability and correctness of their source of influence, the more likely they are to conform to it. Put simply, the greater the reputation of the guru or pundit, the more likely herding behaviour will occur around them.
• Group size: there does appear to be an optimal conformity-inducing group size. So, if half-to-a-dozen serious pundits seem to agree on a particular issue, it is hard not to agree with and follow them.
• Unanimity of group judgement: the more unanimous the group judgement, the more conformity is elicited. Quite small amounts of deviation from the majority lead to a large reduction in conformity. Ultimately, it only takes a few non-conformist contrarians to make herding falter.
• Group composition and attraction: cohesive groups of high status, and prestigious experts, tend to elicit the most conformity. No surprise there. A guru’s opinion carries much more weight, encourages herding and discourages contrarianism.
• Group acceptance: successful, clever people are more often allowed to be contrarians – but you have to earn the points before you are allowed to be a serious contrarian. Of course, low status people also ‘push back’ because they have little to lose.
• Private or public behaviour: people tend to conform more when asked to give their judgement or behave publicly rather than privately. Anonymity has a powerful impact on conformity – hence secret voting. Private investing, when others do not know where, why and how much you invested, may allow more contrarian behaviour.
• Previous success or failure of the group: numerous experiments have demonstrated that a person will conform more to a group with a past history of success than to one that has consistently failed. So, paradoxically, successful contrarians attract a loyal following, while failed conformists soon lose their glitter.
• Consistency of the minority: a convinced, coherent minority forming a representative sub-group of individuals can greatly influence majority opinion. It is most important that the minority is consistent in its position if it is to have any effect on the majority. If there is a small, strong, articulate, ‘contrarian sect’, they can have a surprisingly powerful effect on the herding conformists.
So why do people conform? In short, people both want to be right and to be liked. They respond to informational influence and normative influence.
Of course, there are personality and cultural predictors of conformity. People with low self-confidence and more authoritarian attitudes conform more. Those who are more mature and have higher ego-strength conform less.
“Simply swimming against the stream guarantees nothing, although it may at times be the right thing to do. One can be a ‘bloody-minded’ contrarian who simply reacts against the majority”
There is also evidence of some cultural factors in conformity. Cultures that tend to be more individualistic, like the Anglo-Saxon world, have less pressure to conform than collectivistic cultures. Similarly, those who are homogenous with strong religious or political ideology tend to be more conformist.
It is hard to be a contrarian and resist herding impulses. But do contrarians make more money: is it a proven ‘superior’ investment strategy? Simply swimming against the stream guarantees nothing, although it may at times be the right thing to do. One can be a ‘bloody-minded’ contrarian who simply reacts against the majority.
However, the value-driven investor who has done their homework, who is out-of-kilter with the crowd, and who has the courage to resist the possibility of rejection, contempt and humiliation, may yet see that the courage of their conviction wins the day.
Adrian Furnham is principal, behavioural psychology, at Stamford Associates, and professor of psychology at University College London