Thursday, May 27, 2010

The Milgram Experiments

In 1961, Stanley Milgram conducted a series of social psychology experiments to measure the willingness of ordinary people to obey an authority figure who has instructed them to perform acts that conflicted with their personal conscience.

The experiment

Three people took part in these experiments - the teacher (participant), the learner (victim) and the experimenter (authority figure). Only the teacher was the real participant in the experiment. The role of experimenter was that of stern, impassive doctor with a white beard & wearing a long white overcoat. The learner was an actor who didn't have a major role in the experiment.

The experimenter would tell the teacher that this experiment was being conducted to study memory and its impact on learning in different situations. Per the rules of the experiment, the teacher would ask a question to the learner and if the answer is incorrect, then a small electric shock would be administered on the learner. These shock increased at a 15-volt increment, starting from 30 volts and going all the way upto 450 volts. After these instructions the teacher and the learner are separated and moved to different rooms. They cant see, but can listen to one another. The experimenter is in the same room as the teacher.

As the experiment continues and the teacher administers these shocks to the learner - it becomes apparent that the learner is in considerable pain. He shouts back at the teacher to stop and even bangs the wall. At around 135-150 volts, most teachers start questioning the experimenter on the purpose of the experiment after listening to the learner experiencing pain. The experimenter would normally say "Please continue" or "The experiment requires you to continue" or "These shocks will not have any long-term damages on the learner". The teacher would then continue and keep addressing his concern to the experimenter who would blankly request the teacher to continue the experiment.

The results

Now ask yourself these questions :

At what point (volts) will you stop when you know that the person on the other room is in excruciating pain? Will you go on and deliver 450 volts of lethal electric shock?

When this question was asked of a fairly large sample of people, only 1.2% were prepared to inflict the lethal 450-volt shock. And although there is no record on the voltage point of stopping the activity, I assume this would be pretty low as most people know how lethal even a 220 volt shock can be. (220 volts is the standard voltage in UK and India)

However when Milgram conducted his experiments - 65% of the participants pressed the 450-volt button. Most of them ever very uncomfortable doing so and at some point, every participant paused and questioned the experimenter. But 24 out of the 40 participants continued and delivered the lethal 450 volts. Of the remaining 35% (who stopped participating mid-way), only 1 person stopped before reaching the 300-volt mark.

The learnings

The experiment shows that ordinary people will go against their conscience and morality to even inflict pain on others, when ordered by an authority figure. Very few people have the resources to resist authority and these are the frightening implications of human nature.

Professor Milgram elaborated two theories explaining his results -
1. The theory of conformism which says, a subject who has neither ability nor expertise to make decisions, especially in a crisis, will leave decision making to the group and its hierarchy.
2. The agentic state theory wherein under an environment of obedience, a person comes to view himself as the instrument for carrying out another person's wishes, and he therefore no longer sees himself as responsible for his actions.

BBC re-enacted the Milgram experiments under a series "How violent are you?". The videos can be viewed here (Part 1 - 6 mins) (Part 2 - 6 mins) (Part 3 - 4 mins). These are worth watching.

Questions for you :
1. How many times do you get swayed by and invest based on recommendations by brokers, day traders and friends?
2. How often do you follow the mob especially in crisis situations? (although they are excellent opportunities for sane investors)

Extra : The Asch experiments also give proof of social conformity. There is a lot of literature on the subject but can be best described in this video (here - 2 mins)

39 comments:

Neeraj Marathe said...

Hi Shankar,
I am quite sure, u must have read 'Predictably Irrational'..its an amazing book, do read it in case you havnt..
Really nice to see you posting on such topics man..
Cheers!
Neeraj
P.S. Whats ur email id? Mine is research.neeraj@gmail.com

Shankar Nath said...

Hi Neeraj,

Was a pleasure reading your blog.

Yes, Predictably Irrational is an excellent book and can be applied to different management areas. The part I really liked was the 'relativity' concept. More specifically the pricing of The Economist where a decoy was used to entice people towards the more expensive option.

Similarly there is anchoring. I recently read a newspaper article which attempted to prove how expensive stocks have become. They used the 52-week low to support their point. What they have done is to use the 52wk low as an anchor and people start avoiding these scrip as they were 'relatively' cheaper an year back .... But then as time goes by, they get adjusted to their new reality and the 52-week low increases. Assume stock A is available at 50 with a 52wk low of 20. So you avoid it. The stock starts doing really well and two years later you find that the stock price is 60 and the 52wk low is 57. You will be enticed to purchase the stock at 60, irrespective of any changes to the business fundamentals. A classic case of anchoring.

This is my case why stock screeners should avoid a high bias on 52-week lows .. although i must add, that it requires discipline to completely negate that number. Its a tough anchor.

I'm available at shankarnath@gmail.com

Regards
Shankar

Neeraj Marathe said...

Hi Shankar,
Yes, i totally agree with u..i see this type of anchoring (52-week wala) all around..a lot of people are like, price has gone up 3 times from 52 week low..how can one buy now?!!
People therefore start looking for stocks 'near 52 week low'..well thats a bad way to start lookin for stocks, coz usually there wud be a reason they r at '52 week low', isnt it? :-D Most people are not interested in this reasoning. the fact that it is at 52 week low is enuf for them..do keep posting on such topics..
cheers!
Neeraj

Ninad Kunder said...

Hi Shankar

The Milgram experiment created a lot of controvery bcos there is a darker side to the experiment.

You can justify a lot things keeping this as the basis. For ex it opens up the loop whether down the line officers in Nazi Germany were guilty or merely following orders in the Holocaust.

I think u r back on the blog after a long time.

Cheers

Ninad

Shankar Nath said...

Hi Ninad,

True, the Milgram experiment was infamously inspired by the WW2 episodes. The experiment was specifically designed to show the violent nature of humans upon the presence of an authority figure. Politics is a prime example. Another unfortunate event I can think of is the Jim Jones mass suicide in the 1970s.

When I put myself on the chair and if someone asks me if I'd electrocut a person - I will say no way .. and yet the truth is - in every experiment conducted over 50% of the people have pressed the 450-volt button.

A more 'humane' quasi-Milgram experiment happens each day with us.
1. When the boss comes around the office and says, "I like Mr. X's proposal but I'll leave the decision to you" (he is like the experimenter who says nothing but says a lot)
2. In our movie preferences, when a movie critic who writes for the national daily can easily swing the movie going audience and can be the difference between a movie grossing 10 crores or 20 crores.

They dont push the button, we do. But we sure are influenced by them.

Regards,
Shankar

Ninad Kunder said...

Hi Shankar

Influencers are all around us and part of our daily lives. Our wives influence our decisions, our children decide which toothpaste we use, our peer group influence which car we buy etc etc.

I think the significance of the Milgram experiment more than influencers is the fact that as human beings we are wired to listen to authority. And the Milgram experiment points out that authority can overide our moral/ ethical framework and enable people to rationalise their actions.

Cheers

Ninad

valueinvestinginindia said...

Good one!

I guess when it comes to applying this to investing, retail investors, who are reasonably sensible and follow value investing principles, can to a certain extent stay away from the noise and not get influenced. We have lesser opportunities to get influenced.

Whereas this is very difficult for Mutual Fund managers, who, being swarmed by analysts and associates and group think, most cannot hold their ground. And anyway, they don't have a problem losing money. Their bigger problem is about losing the job!

No wonder in most places, the value investors stay away from the center of action to shut off the noise.

valueinvestinginindia said...

Good one!

I guess when it comes to applying this to investing, retail investors, who follow value investing principles, can to a certain extent stay away from the noise and not get influenced. We have lesser opportunities to get influenced, at least as long as we don't watch TV or don't find every other respected value investor selling.

Whereas this is very difficult for Mutual Fund managers, who, being swarmed by analysts and associates and group think, most cannot hold their ground. And anyway, they don't have a problem losing money. Their bigger problem is about losing the job!

No wonder in most places, the value investors stay away from the center of action to shut off the noise.

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