Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Social Proof Why We Follow the Crowd
Transcript
- Lucas: You're standing on a sidewalk in midtown Manhattan. 1969. A guy in a suit walks past you, stops, and looks up at a building for sixty seconds. Luna: One guy looking up at nothing. Classic New York. Lucas: Right. But the researchers weren't studying the sky. They wanted to know how many people would stop if they saw someone else staring. So they had a group of confederates — actors — stand on the sidewalk and look up at a sixth-floor window. Luna: How many confederates? Because the number matters. Lucas: It does. They tried with one person, two, three, five, ten, and fifteen. With just one guy looking up, about four percent of passersby stopped. With five people, the rate jumped to almost half — forty-eight percent. And with fifteen confederates, eighty percent of pedestrians stopped and stared at nothing. Luna: Eighty percent. That's not a subtle effect. People are basically copying each other without even thinking about it. Lucas: That's exactly the concept we're talking about today — social proof. It's the tendency to look to others to figure out the right behavior, especially when the situation is ambiguous. And it's one of the most powerful forces in economics, because it drives everything from stock market frenzies to why we pick one restaurant over another. Luna: It's also why every coffee shop in Brooklyn has a line out the door at nine AM on a Saturday. You see the line and think, 'This must be good.' Lucas: Exactly. And businesses know this. So they engineer it. There's a famous case from 2015 with the Impossible Burger — the plant-based patty that looks and bleeds like beef. When they launched at a restaurant called Momofuku Nishi in New York, they intentionally created a scarcity narrative and a visible queue. Luna: I remember reading about that. People were waiting two hours just to try it. Lucas: And the company leaned into that. They had a limited supply each day, and they'd post on social media when the burgers were 'almost gone.' That cue — the long line, the scarcity — was social proof multiplied by urgency. It worked. The Impossible Burger became a phenomenon, and within a few years it was in thousands of grocery stores. Luna: But is that always a good thing? Because social proof can also lead people to make bad decisions — like following the crowd off a cliff. Lucas: Absolutely. In fact, one of the most famous examples of social proof backfiring is the Netflix price hike of 2011. Netflix announced it was splitting its DVD and streaming services and raising prices by sixty percent. Customers were furious. But what made it worse was the cascade — people saw others canceling, so they canceled too. In one quarter, Netflix lost about eight hundred thousand subscribers in the U.S. Luna: That's a herd mentality. Once a few people bolt, everyone starts to wonder if they should too. Lucas: Yeah. And it's not just consumer behavior. Social proof plays a huge role in financial markets. When a stock is going up, people buy because others are buying — that's momentum investing. But when it starts to fall, the same mechanism triggers panic selling. It's the same psychological wiring. Luna: So what separates helpful social proof from harmful? Is it just whether the crowd is right or wrong? Lucas: Partly, but the research suggests there's a nuance. Social proof is most powerful when we're uncertain. If you're an expert, you're less likely to be swayed. But if you're not sure — say you're choosing a plumber or a new phone plan — you'll lean on what other people did. The problem is that the crowd can be wrong, especially when everyone is copying everyone else without independent information. Luna: That's the information cascade idea. You see someone choose a restaurant, and you assume they know something. But they might have just been copying someone else too. Lucas: Right. And that's why online reviews are such a double-edged sword. A product with a thousand five-star ratings looks great, but a lot of those ratings might be from people who bought it because it had good ratings — a circular loop. Some studies suggest that a single early review can skew the entire trajectory of a product's sales. Luna: There's a famous study about that on Amazon — a team of researchers showed that a five-star review early on can make a product a bestseller, even if later reviews are mixed. The initial social proof sets the anchor. Lucas: Exactly. And this ties back to the Milgram sidewalk study. The number of confederates mattered — more people looking up meant more passersby stopped. But what's interesting is that in a follow-up, the researchers had the confederates look down at the curb instead. Almost nobody stopped. So the direction of attention matters too. It's not just that people are around — it's what they're attending to. Luna: So if you want to use social proof to sell something, you need to show that people are paying attention to your product, not just standing near it. Lucas: That's the insight behind 'best-seller' labels and 'most popular' badges. They're not just information — they're a signal that a lot of other people have already decided this is worth their attention. Luna: And I'd argue that social proof is also why the 'buy me a coffee' model works for podcasts like ours. When listeners see that others find value in what we do, it reinforces that this is something worth supporting. Lucas: That's a great point. If today was actually useful to you, the way these episodes stay ad-free is through listener support — you can find us at buy me a coffee dot com slash fexingo. It's a small way to keep the conversation going without commercials. Luna: And it really does help. Every contribution makes a difference. But back to social proof — let's talk about when it can be manipulated. Lucas: Sure. One of the most manipulative uses of social proof is in the context of 'astroturfing' — creating fake grassroots enthusiasm. A company pays people to leave positive reviews or to line up outside a store, making it look like the product is popular. It's deceptive, but it works because our brains are wired to trust the crowd. Luna: There was a big case a few years ago with Samsung. They were caught paying people to post negative reviews of competitors' phones. That's the dark side of social proof — using it to harm rivals. Lucas: Right. And regulators are starting to crack down. The Federal Trade Commission in the U.S. has updated its guidelines on endorsements and fake reviews. But enforcement is still catching up to the scale of the problem. Luna: So what's the takeaway for someone listening? How do we avoid being manipulated by social proof? Lucas: The first step is awareness. When you see a long line or a product with thousands of reviews, stop and ask: is this crowd based on independent decisions, or is it a cascade? If you're in a high-stakes situation — like investing or a significant purchase — try to gather your own information before following the herd. Luna: There's also something called the 'wisdom of the crowd' — but only if the crowd's judgments are independent. If everyone is copying everyone else, the crowd is actually dumber than the average person. Lucas: That's exactly right. The classic example is the jellybean jar — if you ask a hundred people to guess the number of beans and average their guesses, you get a remarkably accurate estimate. But that only works if each guess is independent. If they talk to each other, the average becomes biased. Luna: So social proof is a shortcut that works well in some contexts — like which restaurant is popular — but fails in others, especially when the crowd is misinformed or manipulated. Lucas: Exactly. And that's why I think the most practical application is to pause before acting on what 'everyone else' is doing. Whether it's buying a stock, choosing a hotel, or even deciding what to watch tonight, a moment of reflection can save you from following a cascade that leads nowhere. Luna: Or to staring at an empty building for sixty seconds. Lucas: Ha. Exactly. Thanks for listening to Behavioral Economics with Fexingo. We'll be back next week with another episode.