Social Influences Affecting Investment Decisions

Essentially, humans are social creatures; it means that even when it comes to other aspects of our lives like finances, business, and investment decisions, others have a strong pull on our social influences.

Abraham Maslow, was an American psychologist, who created the Maslow's hierarchy of needs. His theory explains how humans rank their most pressing needs.

After physiological needs which comprises of the basic needs for food, water, and shelter, we have the need for safety. And right after these two needs are met, the next is the need for love. It is the need for social interaction, and inclusion.

As humans, one of our core needs is that of love and belonging. We need to interact with one another to survive. This is why one of the easier way to make a person lose his or her mind, is to leave the person in isolation.

Essentially, humans are social creatures; it means that even when it comes to other aspects of our lives like finances, business, and investment decisions, others have a strong pull on our social influences.

Regardless of how independent we try to be with our investment decisions, there are social factors that influence us in one way or the other. Here are some of the social influences:

Primary Influence Groups

When a human is born, he or she is thrust into a family system and grows with that system. That system forms the first form of influence he or she has about life and all that is in it.

It affects shape his or her biases, convictions, fears, and so on. The individual is not involved in the selection process of the kind of home he or she is or the kind of beliefs they have for the most part, and caves into them until much later when he or she can make better decisions.

However, more often than not, humans tend to retain the biases they have grown up with at least to a certain degree. The next form of primary influence are friends. While friends are generally chosen, they too come with their ideologies that eventually become acceptable to us.

These social interactions from the primary influence groups of friends and family members, generally influences our investment decisions directly when they offer their opinions and subliminally based on who they are.

Secondary Influence Groups

There are other forms of influences that are formed that influence our investment decisions. Religion and culture is one of them. For some people, regardless of how alluring the investment in a company that produces alcoholic beverages is, they would never take on the opportunity.

A stronger pull for influence is the herd mentality which essentially drives the market. Humans naturally would do what others are doing whether they know it or not.

This is why when you hear the news about an investment, you don’t try to do opposite of what everybody expects you to do. It is also why human behaviour in the investment world can be predicted.

While these groups are not necessarily bad because we need information from various sources to make decisions, they can also be very restricting. All investment decisions should have a higher degree of objectivity in the decision making process as opposed to just herd behaviour or family ideologies.

Sentiment, as much as possible, should be removed from the decision making process. Assess every decision you take and see if you are making it because of what you’ve heard or based on a factual understanding of what is.

With this in place, half of your investment problems will be solved.

Written by Lawretta Egba.