In July 1961, three months after the trial of German Nazi war criminal Adolf Eichmann began, Stanley Milgram devised an experiment to answer the following question: How could anyone follow orders that led to such atrocities? Milgram published his findings in a Behavioral study of Obedience (1963).
The experiment involved three people: the one running the experiment, the subject of the experiment, and an actor pretending to be a second subject. The subject and the actor would both draw a slip of paper that assigned their role – either teacher or learner. However, both slips said teacher and the actor always claimed learner.
The experimenter would instruct the subject to ask the actor a series of memory related questions, and for every wrong answer press a button that administered a shock to the actor. As the shocks got progressively worse, the actor would plead for the subject to stop, claiming that they had a heart issue.
The results were shocking: 65% of the subjects tested would administer the highest level shock despite displaying discomfort in doing so. Milgram summarized the findings:
Ordinary people, simply doing their jobs, and without any particular hostility on their part, can become agents in a terrible destructive process. Moreover, even when the destructive effects of their work become patently clear, and they are asked to carry out actions incompatible with fundamental standards of morality, relatively few people have the resources needed to resist authority.
Milgram flipped the script on his experiment. He had the actors insist that they were fine, while the experimenter displayed hesitancy in continuing. In these cases, none of the subjects continued administering shocks. Follow-up experiments and peer reviews would show the same thing. The central factor in eliciting the cruel behavior was the influence of an authority figure.
People tend to attribute greater accuracy and influence to an authority figure. If a doctor asks us to do something, we will probably comply – and for good reason. However, this tendency to defer reasoning to an authority can get us in trouble. In a 1995 speech at Harvard University, Charlie Munger gave the following example:
You get a pilot and a co-pilot. The pilot is the authority figure. They don’t do this in airplanes, but they’ve done it in simulators. They have the pilot do something where the co-pilot, who’s been trained in simulators a long time – he knows he’s not to allow the plane to crash – they have the pilot to do something where an idiot co-pilot would know the plane was going to crash, but the pilot’s doing it, and the co-pilot is sitting there, and the pilot is the authority figure. 25% of the time the plane crashes. I mean this is a very powerful psychological tendency.
As it relates to investing
The world of investing has no shortage of experts. From star fund managers to cnbc pundits, everyone has an opinion on what the markets will do tomorrow. Most of the time, these opinions directly contradict each other.
As investors, we should be aware that these experts have an interest in persuading us to think one way or another. Everyone talks their book. When evaluating the truth of any statement, ignore the social status of the speaker and judge the statement on the basis of the underlying facts.
Similarly, just because a CEO says something is best for a company, doesn’t mean it is. A board of directors is supposed to be a check on a CEO’s power, but too often they defer to the judgement of the authority. This, more than anything, is the cause of value destroying short-termism and empire building. It reminds me of the Tesla-SolarCity merger, who thinks they know more than Elon Musk.
In his book Influence: The Psychology of Persuasion, Robert Cialdini notes that:
There is no expedient to which a man will not resort to avoid the real labor of thinking.
Deferring to authority is probably one of the most useful and most dangerous mental shortcuts. At it’s best, it saves us years of study in a specialized field. At it’s worse, it leads to the most horrific crimes in the world’s history. As the stakes get higher, we would do better to utilize our own reasoning.