How does the 'Social Proof' bias in Charlie Munger's theory contribute to the formation of asset bubbles?

Under Charlie Munger's psychological framework, the "Social-Proof Tendency" is one of the key biases leading to irrational behavior and poor decision-making. When applied to financial markets, it becomes a core driver fueling asset bubbles.

Its mechanism can be broken down into the following steps:

1. Initial Catalyst and Success Demonstration

Asset bubbles typically begin with a compelling "story" or a genuine success case. This could be a new technology (like the internet or blockchain), a new policy (such as relaxed real estate regulations), or simply an initial price surge in an asset. Early investors reap substantial returns, and their success stories spread rapidly through media and social circles.

2. Activation of the "Social-Proof" Bias

When people, especially ordinary investors unfamiliar with the asset class, see others around them (neighbors, colleagues, friends) or "experts" in the media discussing and profiting from it, the "social-proof" bias kicks in.

Mental Shortcut: Human brains favor shortcuts. Faced with uncertainty ("What is this stock/house/cryptocurrency really worth?"), people abandon complex independent analysis and instead observe others' actions to decide their own. Subconsciously, they think: "Since so many people are buying, it must be good. Following the crowd can't be wrong."
Herd Pressure and Fear of Missing Out (FOMO): Seeing others profit while being left out generates intense anxiety and a sense of exclusion—Fear of Missing Out (FOMO). This psychological pressure compels people to join the buying frenzy, not because they believe in the asset's intrinsic value, but because they fear missing an "easy money" opportunity.

3. Erosion of Rational Analysis

Driven by social proof, the basis for investment decisions fundamentally shifts:

From "Value" to "Trend": Investors shift focus from "What is this asset's intrinsic value?" to "Will the price keep rising tomorrow?" Others' buying behavior itself becomes the sole "proof" that prices will increase.
Ignoring Negative Information: Any analysis or warnings unfavorable to the asset price are dismissed as "uninformed" or "outdated" noise. Group consensus forms a psychological barrier, blocking rational voices.

4. The "Lollapalooza Effect": Resonance of Multiple Biases

Munger emphasizes that a single psychological bias is rarely enough to cause major disasters. Asset bubble formation results from multiple biases interacting and reinforcing each other—a phenomenon he calls the "Lollapalooza Effect." Driven by social proof, the following biases work together to inflate the bubble:

Reward and Punishment Superresponse Tendency: Witnessing others' rapid wealth creation provides a powerful "reward" stimulus, greatly amplifying speculative desire.
Availability-Misweighing Tendency: Media's extensive coverage of get-rich-quick stories makes these successes more mentally accessible, causing people to overestimate profit potential and underestimate risk.
Overoptimism Tendency: People believe "this time is different," that past bubble bursts won't repeat, and that they can exit successfully before the crash.
Authority-Misinfluence Tendency: When so-called financial "experts," analysts, or celebrities join the bullish chorus, it further strengthens social proof, solidifying public conviction.

5. Bubble Peak and Collapse

This social-proof-driven positive feedback loop (buying pushes prices up -> higher prices attract more buyers) continuously self-reinforces until asset prices detach completely from fundamentals, reaching an irrational peak.

However, when an event (like rising interest rates, a key bankruptcy, or regulatory tightening) shatters optimistic expectations, or when price increases become unsustainable, social proof exerts a reverse effect. Panic selling erupts. Seeing others sell, people follow suit, triggering a downward price spiral and the eventual bubble collapse.

In summary, Munger argues that the social-proof bias turns humans into "creatures of imitation." In financial markets, it causes investors to abandon value-based independent judgment and instead chase the crowd's frenzy. This creates a self-fulfilling prophecy, driving asset prices to unsustainable heights and ultimately brewing a bubble.