Fat Friends and Lonely Investors

By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks on Thursday, 2 August 2007, 7.45 am and 7.20 pm)

If your best friend sitting next to you is fat, there’s a good chance that you are fat too. If you are not, then you will be very soon.

This is according to a study published last week in the New England Journal of Medicine. It shows that a person’s chance of becoming fat is 57 percent, if he or she has a fat friend of the opposite sex. The chance of becoming fat shoots up to 71 percent, if your fat friend is of the same sex.

How can that be, you ask? Isn’t there a genetic component at work? In fact, there is. According to studies on genes and obesity, all of us have a genetically determined weight range of about 13 kilograms.

So whether we are 13 kilograms above or below our genetically determined weight, depends on the environment. The question puzzling scientists has always been: why?

The study released last week shows that there is a strong relationship between obesity and friendship. It suggests that our social networks have a much greater impact on making us fat than our genes.

The study may explain why our best efforts to slim down are so often futile. If someone close to us eats like a pig, we don’t feel as bad about it when we ourselves eat like pigs.

This tendency to behave in a social network is also carried over into the world of investments. In the past decade, a new school of thought, called “behavioural finance”, has evolved to try and understand investors’ behaviour.

One of the things discovered is that there is a strong tendency for investors to sell winners too soon and hold on to losers too long.

The possible explanation for this is that investors, especially men, like to boast about their successes. So once a little profit is registered, they will sell, giving them the reason to boast.

On the other hand, when losses are registered, investors would rather not sell and talk about their failures. More often than not, the losses mount. Because of this peculiar behavior, 9 out of 10 investors will eventually lose money.

Another thing which we have discovered is that investors tend to be very sociable people. This is understandable. There are some things in life, like books and movies, whereby the quality of our experience depends on whether others experience it as well.

When both of us have seen the same movie or read the same book, we can delight in conversation about it. Economists call such interactions “network externalities”. We must not underestimate its impact. It has played an important role in the success of bestsellers like Harry Potter.

Let’s take a group of friends. After one friend starts to boast about his profits in property investments, for example, the tendency is that the whole group of friends will end up dabbling in property investments too.

The danger of such social networks is that information exchanged about the property market tends to verge on the sensational. That is why, both the HDB and URA had to release detailed property data last weekend, to address any wrong perception.

Therefore, the weakness of any interaction between investors is not very different from that between fat friends.

So, if you want to be a successful investor, the solution is to invest alone. In the absence of friends to boast to, you will make better investment decisions. And if you want to be slim, the solution is not to have best friends who are fat.