Sophie, a second-year PGDM student, is fascinated by the study of behavioural finance. She decided to conduct a research project to explore how social proof impacts investment decisions. Sophie designs a survey targeting investors from various backgrounds and levels of experience.  Sophie distributes her survey to a sample of 200 investors. The survey includes questions about their investment strategies, risk tolerance, and the extent to which they rely on social proof when making investment decisions.  Sophie's survey results reveal that 70% of respondents admit to considering the investment choices of their peers before making their own decisions. Discuss the implications of this finding for individual investors and financial markets.  Considering the prevalence of social proof in investment decisions, how might portfolio managers leverage or mitigate its influence to improve portfolio performance? Discuss strategies that portfolio managers could adopt to address social proof bias within their investment strategies.  Sophie's research highlights the significant impact of social proof on investment decisions. It underscores the importance of understanding behavioural biases in finance and suggests avenues for further research and practical application in portfolio management and investor education.

Learning Objectives

1. Define the concept of social proof in the context of behavioural finance.

2. How does social proof influence individuals' investment decisions? Provide examples.

3. Identify and explain at least two psychological biases related to social proof that may affect investors' decision-making processes.

4. How can investors mitigate the negative effects of these biases when making investment decisions?