The Song Remains the Same

“True knowledge exists in knowing that you know nothing.”

— Socrates

The twentieth century was one of the most momentous in human history. Technology altered every sphere of politics, business, and day-to-day life to the point where the lifestyle of people at the turn of the twenty-first century bore almost no resemblance to those living at the turn of the twentieth. Yet one hundred years is only a minuscule fraction of the two hundred thousand years that Homo sapiens have inhabited the earth. To put this in perspective, 99 percent of human existence took place before the lifetime of Jesus Christ and 99.75 percent took place before the discovery of the New World.

The pace of visible change in our world, driven by amazing advances in human knowledge, can trick us into thinking that the psychological pitfalls that afflicted prior generations no longer apply to us. But nothing could be further from the truth. The reality is that, at an evolutionary level, a few hundred years means very little and human misjudgment of the realities of our modern environment is widespread. We can study aspects of our psychological makeup which lead to misjudgment but we cannot trick ourselves into thinking that knowledge of these pitfalls makes us fully immune.

Financial markets have certainly changed a great deal since 1940 when Fred Schwed published Where Are the Customers’ Yachts. Schwed wrote at a time when investors were skeptical regarding the stock market. The 1929 crash took place a decade earlier and stock prices were still far from the record highs. The Second World War was underway with Nazi Germany on the rise. Surely, a book regarding Wall Street written at that time would be a relic of a bygone age, one that has little relevance to us today? Yet, that is not the case at all. Anyone who spends a few hours reading this book today will, between bouts of uncontrolled laughter, recognize that very little has changed in terms of human behavior. As Michael Lewis writes in the introduction to the book, “What Schwed has done is capture fully — in deceptively simple language — the lunacy at the heart of the investment business: the widely held belief that there is someone out there who can tell you how to turn a little money into a lot, quickly.”

Passion for Prophesy

The spring of 2020 is one of the most uncertain times in recent memory with the COVID-19 pandemic underway and financial markets unsure of how to interpret the tsunami of incoming information. The demand for forecasts might be at an all-time high, but as Howard Marks pointed out recently, the future is determined by thousands of factors that must be accurately weighed and very few, if any, people are capable of balancing all of the relevant factors and assessing future risks and returns. One might say that there is a “passion for prophesy” today.

As Schwed pointed out eight decades ago, that passion for prophesy has always existed when it comes to financial markets. Investors are not content to make their own decisions and merely seek efficient execution of their trades.

For one thing, customers have an unfortunate habit of asking about the financial future. Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer. Rarely will it be the most difficult of all answers — “I don’t know.” …

But I doubt if there are many, or any, Wall Streeters who sit down and say to themselves coolly, “Now let’s see. What cock-and-bull story shall I invent and tell them today?” I don’t think you can supply any guarantee of accuracy when looking into the heart and mind of someone else. But I feel, from years of personal observation, that the usual thought process is far more innocent. The broker influences the customer with his knowledge of the future, but only after he has convinced himself. The worst that should be said of him is that he wants to convince himself badly and that he therefore succeeds in convincing himself — generally badly.

Where Are the Customers’ Yachts?, p. 16-17

Schwed wisely applies the concept of Hanlon’s Razor in this case, choosing to give the benefit of the doubt to those who meet the perennial demand for market forecasts. He could not have imagined the modern financial landscape with networks like CNBC providing nonstop market commentary along with interviews of dozens of prophets who appear every day to furnish the interpretation of events that viewers so desperately seek. The vast majority of these commentators are not trying to deceive anyone. As in Schwed’s day, they have either personally studied massive amounts of data or relied on economists at their firms who have done so. And they believe that these studies provide an edge when it comes to divining the course of future events. Schwed dryly observed that “the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter’s consciousness.”

Cash is Trash

Following the financial crisis and recession of 2008-09, interest rates in the United States have remained at very low levels which has made it very difficult for investors to realize meaningful income from risk-free assets such as U.S. treasury securities. Interest rates were also at very low levels in 1940 when Schwed published his book. Investors may have been scared of investing in the stock market, but “doing nothing” and staying in cash was painful as well. Schwed refers to customers who dread having any cash as suffering from a psychiatric disturbance called “rhinophobia”.

Customers who suffer from rhinophobia always have as many securities as possible. When they sell out stocks at a profit they hasten to fill the void in their accounts with other stocks. The odd part is that they are frequently economical souls who do not believe in frittering away their money on food and drink and momentary pleasure … To them, having a sizable cash balance in an account for any length of time is unbearable. Suppose stocks should go way up? They would be left high and dry with nothing but some dirty old money.

Where Are the Customers’ Yachts?, p. 62

Sounds familiar, doesn’t it?

Rhinophobia affects small and large investors alike, as we saw in January when Ray Dalio referred to cash as trash:

Ray Dalio, founder of investment firm Bridgewater Associates, said Tuesday that he thinks investors shouldn’t miss out on the strength of the current market and that they should dump cash for a diversified portfolio.

“Everybody is missing out, so everybody wants to get in,” Dalio said on CNBC’s “Squawk Box” at the World Economic Forum in Davos, Switzerland.

Dalio advised having a global and well-diversified portfolio in this market and said the thing people can’t “jump into” is cash.

“Cash is trash,” Dalio said. “Get out of cash. There’s still a lot of money in cash.”

Source: CNBC article dated 1/21/2020, retrieved on 5/19/2020

Ray Dalio was not alone in January. Few investors, large or small, wanted to be sitting in cash at a time when stock markets were posting record highs. Although investors knew about the emergence of a strange new disease in Asia, very few thought that it would have a massive impact on the U.S. economy. Prophesy was difficult in 1940 and it remains difficult in 2020.

Leverage

If cash is trash, and it certainly seems to be in bull markets, the next seemingly logical step for an investor to take is to not only be fully invested in stocks but to borrow some money at an attractive interest rate to buy even more stocks. During the 1920s stock market boom, margin requirements were not yet regulated and customers could shop around at different brokerages which competed for business based on low margin policies. By 1940, margin requirements were fixed, but Schwed notes that the practice still tempted investors:

Americans find margin trading a particularly attractive little invention. It parallels the American principle that the first thing a man should do with his home, even before moving in, is to put it in hock. The idea is that he only has to pay six per cent or so on the mortgage and if he can’t wangle something better than a measly six per cent out of a round lot of money, he ought not to be in business. This is another argument I am unable and unwilling to discuss further.

The idea is easily extended to margin trading. We assume that it is a wise and profitable venture to buy 100 shares of United Fido at ten, paying $1,000 for it. Ergo, wouldn’t it be even better to buy 200 shares paying the same $1,000? And even better to make it three or four hundred if we can find a sufficiently kindly broker to do us this favor?

The answer is no. But I only know one way of proving it to you conclusively. Go try it.

Where Are the Customers’ Yachts?, p. 54

Certain lessons can only be learned by actually losing money. Testing your strategies with a “paper portfolio” will not do the trick. It is one thing to lose money on paper and quite another to lose real money, as Schwed dryly notes: “There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.”

Leverage can be deadly but has tempted investors throughout history. Intelligent investing in stocks might be a good strategy to get rich. But the compounding effects on small amounts of wealth can seem agonizingly slow for many years before it “snowballs” into real wealth.

As Charlie Munger once said at a Berkshire Hathaway annual meeting, “We get these questions a lot from the enterprising young. It’s a very intelligent question: You look at some old guy who’s rich and you ask, ‘How can I become like you, except faster?’” Well, one way to try to get rich “faster” is to use leverage. As Schwed said eighty years ago, this is a false illusion that every generation of investors seems to have to learn anew.

Buying the “Best Securities”

In 1979, Warren Buffett wrote an article entitled “You Pay a Very High Price In The Stock Market For A Cheery Consensus”. Buffett noted that in 1972, pension fund managers could not buy stocks fast enough, which was reflected in their lofty prices. The early 1970s were the height of the “Nifty Fifty” period when the prices of “stocks of the future” were bid up to dizzying heights. Fast forward to 1979 when, after experiencing a bruising bear market in 1973-74 and subsequent years of economic malaise, fund managers were placing orders for stocks “with an eyedropper.”

Four decades earlier, Schwed warned his readers about the perils of buying the “best” securities, that is, those securities that are merely popular at a given point in time:

The pathetic fallacy is that what are thought to be the best are in truth only the most popular — the most active, the most talked of, the most boosted, and consequently, the highest in price at that time. It is very much a matter of fashion, like Eugenie hats or waxed mustaches. When crinolines were being worn, canal bonds were being bought; when the bustle was thought attractive, so were railroad and traction securities. To say that industrial common stocks were all the rage in the late 1920s would be to understate it, and le denier cri for the last few years has been for government bonds and tax-exempts at prices calculated to yield something near zero per cent. Interspersed with such major fashion trends there appear at various times briefer foibles — sudden passions for “war babies”, auto stocks, radio stocks, bank stocks, real-estate mortgages, convertible debentures.

Where Are the Customers’ Yachts?, p. 78-79

Schwed notes that the basic trouble with all of these trends is that people are buying not necessarily the “best” securities but merely those that are most popular at a given point in time. And that popularity itself accounts for prices that often are out of proportion to business prospects. “Implacably, this universal habit of buying the popular securities works for bad results over a period of time.”

The crucial distinction between future prospects for a business enterprise and prospects for its securities is one that generation after generation of investors fail to make. A business with compelling future prospects can make for a lousy investment if its securities are so popular that its bright future is more than fully reflected in the price one must pay to participate.

As of May 2020, the top five companies in the Standard & Poor’s 500 comprise over 21 percent of the index:

Source: Slickcharts.com, retrieved on 5/19/2020

Microsoft, Apple, Amazon, Facebook, and Alphabet are indisputable leaders of our modern economy. Their stocks are also popular not only with active investors but with index funds that automatically purchase these stocks when they receive new inflows of investor funds. Without commenting on the valuation of these companies, we can note that they are undoubtedly popular stocks in 2020. Their popularity might be justified by the underlying business fundamentals or investors may be repeating the “universal habit” of buying what is popular and suffering poor results over time. At the very least, buying popular stocks should always be done with great caution.

Nothing is Ever Enough

Another perennial truth that Schwed describes is the tendency for people to always seek a level of income from their assets that pushes the envelope of what can be prudently attained. This results in the investor, or his advisor, committing the cardinal sin of “reaching for yield”, either literally through the purchase of higher yielding, but riskier fixed income securities, or through more aggressive investments in equity securities.

As a brief thought experiment, consider why reaching for returns is so common. Take a person who has accumulated a sum of $2 million over a number of years through success in running a business. This level of net worth would put this person at the 94th percentile of wealth in the United States.1 Let’s say that this person wishes to retire and draw income on that $2 million for his or her income. If we assume a 3 percent withdrawal rate, the income that can be safely drawn is about $60,000 per year which approximates the median household income. But will a person who has wealth greater than 94 percent of Americans be satisfied with an income that is merely at the median?

The emphasis in the investment problem is usually placed on the proper selection of securities. I suggest that the emphasis would be better placed on how the investor intends to spend his income. The initial mistakes are made in this latter department; the wrong securities are chosen largely as a result of this initial philosophic error.

Where Are the Customers’ Yachts?, p. 150

Just as in 1940, an investment advisor can “fix” the problem of insufficient income and “arrange the larger yield in a jiffy if the family asks for it…. He simply sells out the conservative bonds and substitutes riskier securities.”

Reaching for returns has tempted investors for generations and will always tempt investors because someone who has a net worth of a few million dollars typically feels “rich” and is dissatisfied with only consuming the median income. And one can extrapolate this for higher levels of wealth as well. How many individuals with a net worth of $10 million would be satisfied only drawing $300,000 per year? Clearly some will, but not most. Social proof and the simple temptation to consume will almost always militate against conservation of wealth and lead to a desire for more income. Sometimes the quest for higher income will work out well over time but more often it will end in tears.

The More Things Change …

Rapid technological change can trick us into thinking that the fundamental nature of human beings has changed commensurately, but nothing could be further from the truth. In terms of biological evolution, we are not very different from human beings who lived thousands of years ago in hunter-gatherer cultures that bear no resemblance to our current world. We have inherited the psychology of our ancestors and must work within the constructs of that psychology.

Our advantage as human beings with a sense of history is that we can choose to be aware of the many sources of psychological misjudgment that can afflict us. Although we can never be immune from misjudgment, we can avoid many mistakes if we make a deliberate effort to check ourselves at points where others have gone badly astray.

Fred Schwed’s tales of Wall Street in another era reinforces that today’s investors are not that different from those who lived nearly a century ago. As Jason Zweig notes in his introduction to the book, “Schwed’s is the only financial book, out of hundreds I’ve read, that will provoke you, teach you, and crack you up all at once.”


  1. Net worth percentile calculator based on 2017 data, retrieved on 5/19/2020. []

Farnam Street’s Great Mental Models, Volume 2

“If a man does not know to what port he is steering, no wind is favorable to him.”

— Seneca

Return on investment is the central concept of capital allocation. As investors, we seek to obtain the highest return on investment available within the constraints of our personal risk tolerance. This concept is most clear-cut in the case of a United States treasury security. We know with certainty how much capital we need to part with today in order to secure a return that can be calculated with mathematical precision, at least in nominal terms. Once we enter into other commitments, however, whether we are dealing with corporate bonds, equity securities, real estate, the corner gas station, an apartment building, or a farm, we are only estimating our ultimate return on investment.

The vicissitudes of life often intervene and ruin our best laid plans. On the bright side, good fortune can create Lollapalooza results beyond our wildest expectations. The COVID-19 pandemic of 2020 clearly illustrates the wide variations of possible outcomes in life. Very few things are certain.

The return on a monetary investment is important, but there is no resource more precious than the limited time we have available. How we choose to allocate our time should also be based on some estimate of the returns we expect to receive for the time commitment. This, of course, is not always a financial return. Human beings derive massive returns from time spent with family, friends, and various non-economic pursuits and most people usually choose to devote significant time to those areas.

Whatever our goals, we do not want to waste time because we do not have an unlimited supply of it. The temptation can be to focus our limited time toward a goal with very specific and defined expected returns, making ourselves narrow specialists. But doing so can often leave on the table potential rewards that are harder to predict or define ahead of time, and narrow specialization can make us more fragile to unexpected shocks. We need to develop a general toolkit that provides the optionality to benefit from things that may not yet exist, things that we cannot even begin to fathom let alone for which we can estimate a specific return on investment.

Shane Parrish, Founder of the Farnam Street website, is on a mission to help people “master the best of what other people have already figured out”. Farnam Street, which is named after the street where Berkshire’s Hathaway’s Omaha headquarters is located, has long been a favorite resource for investors as well as many others. But rather than providing stock write-ups or economic commentary, Parrish has focused on helping readers increase their “worldly wisdom”, as long advocated by Berkshire’s Vice Chairman Charlie Munger. Volume 1 of The Great Mental Models book series, reviewed on the Rational Walk earlier this year, covers a number of “general thinking concepts” while Volume 2, the subject of this article, covers concepts in the fields of physics, chemistry, and biology.

The Great Mental Model books are not textbooks in any traditional sense. Volume 2 outlines a number of basic scientific concepts but does not attempt to delve into the subjects beyond the depth needed to provide the general reader with enough context to understand how the mental model might apply more broadly. This has both positive and negative implications. On the positive side, the material is presented in a non-intimidating manner accessible to any intelligent and curious reader and quickly turns the focus toward applying the principle in often surprising contexts. On the negative side, if a reader is expecting an extended explanation of a subject like thermodynamics, they will not find it. However, the book contains numerous references for further reading and the curious reader can find a wealth of free information online, such as the Feynman lectures.

Although many of the mental models discussed in the latest volume, as well as the first, are interconnected in numerous ways, Parrish does not attempt to connect the ideas explicitly, instead encouraging readers to build their own “latticework” of mental models through their own experiences. It is not enough to know one or two models, as Charlie Munger often reminds us. One must know many models and use them regularly. Over time, connections will develop through use that can lead to exponential returns. However, unlike investing in a treasury security, we must take a bit of a leap of faith. Let’s take a look at a few of the mental models discussed in the book and how they might be useful in our day-to-day decision making.


Routines form an important part of the structure of daily life for most people because doing the same things at specified times removes the need to make numerous decisions about what to do next. Every explicit decision we make requires brain power and the cumulative effect can be draining. When we decide to exercise at six-thirty every morning, for example, we remove the need to make a daily decision about when a specific activity will take place.

The tendency of all living beings to minimize energy output is one of the mental models categorized under biology. Energy conservation in most species is a matter of survival. Needless expenditure of energy is wasteful and can result in a lack of energy when an opportunity or crisis emerges. However, for human beings living in a modern society, it is not necessary to expend constant physical energy to survive. Due to this reality as well as the consumption of ultra-processed foods available in abundance in rich countries, obesity has become a major health epidemic.

Beyond the realm of physical activity, humans also tend to minimize energy output on mental tasks, which is why routines can be so helpful. Additionally, the use of heuristics, or mental shortcuts, can allow us to respond to numerous situations on “auto-pilot” without devoting the mental cycles needed to make an actual decision. In cases where the stakes are low and the situation is predictable, heuristics are invaluable in navigating our day-to-day life. But when the stakes are high or the situation is novel, the use of heuristics is a form of laziness that can have catastrophic results.

Routines also help counter inertia. Newton’s first law of motion states that “an object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.” Applied to our daily lives, we need to be aware of the fact that inertia implies that when we stop doing an activity, getting started again is much harder than it would have been to continue the activity continuously. Going running every day at six-thirty in the morning, as a matter of routine, is easier than doing so at random times because the decision has already been made in advance.

Habits are the result of routines. Inertia can be a force for good if we use it to establish good practices and avoid bad ones, and the tendency for a habit to remain intact once we get it started can counter tendencies toward laziness. The longer a habit exists, the more inertia it has to remain in motion on “auto-pilot” and the more difficult it will be to change. Being cognizant of this fact is very useful.


How often have we heard something along the lines of “what catalyst is needed to unlock value” in the share price of an undervalued stock? Is has become something of a cliché to see investor presentations concluding with a series of slides on potential catalysts to “unlock value”. So the concept of catalysis is hardly unknown, but the subtleties may often be misunderstood or overlooked.

The current environment, in the spring of 2020, offers many opportunities to observe catalysts in action. Due to the COVID-19 pandemic, large sectors of the economy have been shut down for some time and the resulting economic turmoil is acting as a catalyst accelerating changes that were either already underway or only in the early stages of formation. There are numerous examples, but the impact of COVID-19 on retail stores and office buildings has been dramatic.

Ever since the dot-com era of the late 1990s, futurists have been predicting that “bricks and mortar” stores would be going the way of the carrier pigeon into extinction. However, the process turned out to be a long-term secular trend rather than a dramatic reversal for traditional retailers. The rise of Amazon.com and other online stores put pressure on “bricks and mortar” and killed many weaker players, but did not cause extinction. Enter COVID-19. With physical storefronts shuttered, consumers flocked to online retailers to fulfill their needs. The pandemic was the catalyst that accelerated financial distress for companies such as J.C. Penney, which is on the verge of bankruptcy. Neiman Marcus, long a destination for wealthy consumers, was pushed into bankruptcy and is in the process of restructuring.

The trend toward telecommuting began two decades ago and technical capacity has long existed to perform most office jobs remotely. However, force of habit and the human need for interaction with other humans has resulted in the traditional office model continuing for most companies. COVID-19 acted as an immediate catalyst when it forced nearly all office workers to either telecommute or face unemployment. While sentiment regarding telecommuting varies widely depending on an individual’s personality and job responsibilities, the pandemic has proven that it is possible for many jobs to be done from home. The temptation for companies to save money on office space will grow and this has implications for owners of office buildings. Although most office leases are long term and the shift may be gradual, it is reasonable to believe that COVID-19 has acted as a catalyst in reducing the long term demand for office space.


Exaptation is a concept in evolutionary biology that refers to a feature of an organism that is used to perform a certain function but was not necessarily produced for that use by natural selection. One example provided in the book involves the feathers that are useful to facilitate flight in birds. Although feathers help birds to fly, they were originally adapted in dinosaurs through natural selection to provide warmth as well as to signal health and vitality to potential mates. At a later point, feathers became an integral structure repurposed for flight in birds.

The concept of exaptation is fascinating because it is distinct from the more commonly known concept of adaptation. What it implies, outside the field of evolutionary biology, is that we can use skills and knowledge that we have obtained for one purpose in order to facilitate activity in totally unrelated areas and in ways that we may not be able to predict at the outset.

There is a distinction in science between basic and applied research. Basic research, also known as fundamental research, is meant to advance human knowledge for its own sake, to expand the level of understanding that we have about the world around us. In contrast, applied research is intended to use the knowledge we have in order to solve specific problems. Clearly, there are incentives to conduct basic research because even though we do not know what we will find, we know that this knowledge will become the “raw materials” for subsequent applied research.

As Jon Gertner describes in The Idea Factory, Bell Labs was arguably the best laboratory for new and often unexpected ideas in the world for many decades during the twentieth century. When given the time, facilities, and funds to pursue basic knowledge, Bell Labs researchers were able to develop numerous new ideas for the benefit of AT&T and society in general. While Bell Labs clearly had a mandate to pursue fields that could be remotely related to human communication, they were allowed an indistinctness regarding specific goals and practical applications.

As Parrish notes, “sometimes things that have no apparent purpose at the outset can later be co-opted into use. Having to know the benefit of everything before you begin leads to missed opportunities.” Numerous commercial products such as bubble wrap, Play-Doh, and botox were originally developed for one purpose and then, through a process of exaptation, leveraged in entirely new and surprising ways.


Why should you devote your most precious asset, time, in order to read about mental models in fields like biology, chemistry, physics, and many more if you earn your living as an accountant, run a small business, or work as a middle manager in a large corporation? What is the return on the investment of your time?

The reality is that no one can answer that question. Investing time to build the mental models that will live inside your brain is a leap of faith. It is entirely possible that you could go down a rabbit hole into a field that has no possible applicability to your life or career, not now and not in the future. But does the subject interest you in and of itself? If so, the pursuit of that knowledge is not a waste. Nor can you predict whether that pursuit might not lead to something applied and tangible in the future, whether it happens in a week or in twenty years.

The power of mental models rarely exists in one isolated model. Instead, the benefits compound over long periods of time as you add more and more mental models to your arsenal. Over time, connections will develop between the models that can lead to insights that otherwise would never be available to you. But perhaps all of that is beside the point. Learning is fun and a good use of your time just for the sake of learning. Farnam Street’s website and book series make mental models accessible and interesting for any intelligent person who wants to expand their horizons.

The Psychology of Masks

In the spring of 1980, my family moved from a small apartment to our first house. For a six year old boy, the excitement of having a backyard to play in was tempered by knowing that I would be switching schools in the fall. The elderly are often stereotyped as being “set in their ways”, but small children are used to their routines and typically dread change. All human beings derive meaning from the social groups to which they belong and, other than immediate family, school is the center of a six year old’s universe.

September came and the time to start second grade arrived. Wearing new clothes and shoes, I remember nervously walking into my new classroom. We are all the center of our own world and the spotlight effect often overstates the degree to which others even take any notice of us at all. But when a new kid joins a class of children that have known each other as long as they can remember, the spotlight really is on you. I was about the same size as the other boys and similar in most ways, including my clothes. But not my shoes! I wore high quality leather shoes, something similar to Rockports, while most other boys wore either Vans or Converse High Tops. Although hardly a debacle, mild ribbing ensued and is still recalled four decades later!

When we go out in public, most people want to appear at least somewhat presentable to others, especially in case we encounter individuals who we know. Generally, the goal is to appear confident, sophisticated, and polished in all but the least formal settings. What is true for the six year old entering a new school is equally true for the 22 year old starting her first job after college or the 50 year old executive going to a dinner party hosted by his company’s CEO. We compare ourselves to others, especially those who appear to be very similar in background. Most people dread “sticking out like a sore thumb” and will avoid doing things to draw attention to themselves, especially negative attention.


Social proof is a crucial principle to understand because it applies in so many different contexts and often is used to manipulate human behavior. According to Robert Cialdini, author of Influence: The Psychology of Persuasion, social proof states that one means that we use to determine what is correct is to find out what other people think is correct. Especially in ambiguous situations, we tend to look at what other people are doing as a guide for what we should be doing. If the parking lot of a grocery story is strewn with shopping carts left haphazardly, we are more likely to simply leave our cart behind our car rather than return it to the front of the store. The effect is enhanced when we see someone we perceive to be an exemplar doing something in an ambiguous situation. If a group of pedestrians are waiting to cross a busy street at an intersection, they are more likely to jaywalk against a red light if a well-dressed man in a suit starts across the street than if a homeless man takes the lead.

Taking cues from others is one of the fundamental ways in which we navigate the world, but the degree to which people look to those in positions of authority to set the tone can vary across cultures and political systems. A homogenous culture with a high degree of respect for authority is going to be much more sensitive to the tone set by political leaders than a diverse culture with a history of vigorous independent thought and skepticism regarding conventional wisdom. The stronger the sense of individualism in a society, the more resistant people are going to be to any effort by authorities to establish social norms. In particularly independent-minded societies, people may actually be eager to do the opposite of what they are encouraged to do especially if they don’t understand or agree with a policy.

While it may seem logical to observe the actions of others when deciding what you should do, we often forget that the people we are observing are probably in the same boat that we are in. They too are probably confused and looking at what we are doing. This is a phenomenon that Cialdini refers to as pluralistic ignorance. He describes horrifying incidents in New York City of large groups of people observing crimes in progress and doing nothing whatsoever to stop an attack. The media described these incidents as attributable to callousness and apathy but Cialdini believes that it is more likely that the crowd was paralyzed because each individual was looking to others to decide what to do and, in a self-reinforcing feedback loop, no one did anything.


Think back to a day not so long ago, probably in January or early February, when the COVID-19 pandemic was merely a minor news story about some weird illness in China caused by unsanitary practices at an open-air market. Many of these stories were often accompanied by photos of people wearing masks for protection. Some of us might recall seeing similar images during the 2002-03 SARS epidemic which caused several hundred deaths in China and Hong Kong.

If you lived in the United States in January, you might have read an article like that and moved on to other things fairly quickly. What would you think if you saw someone at the grocery store later that day wearing a mask? You might connect it with the story you read, or you might not, but what would quickly come to mind for most people would have been something along the lines of:

  1. This person has a contagious disease and I need to stay as far away as possible.
  2. This person is seriously ill with a compromised immune system and I should stay as far away as possible.
  3. This person is paranoid or eccentric and I should not make eye contact and stay as far away as possible.

In the days before COVID-19 changed the country, there was a certain stigma associated with mask wearing in the United States. It was extremely rare to see anyone wearing a mask and obvious negative connotations existed. Very few people would wear a mask in public, outside a health care setting, unless absolutely necessary. People would either think you are sick or strange. Imagine if you happened to run into one of your neighbors or coworkers!

This cultural norm existed in the United States and most western countries, but the culture of mask wearing in Asia was very different. Mask wearing carried no stigma in East Asian culture for a variety of reasons. Memories of contagious diseases, such as SARS, were more recent in Asia and many people wore masks in public simply due to the higher level of air pollution found in major cities. Wearing a mask even during a normal period of seasonal colds was considered a matter of simple courtesy and people would wear masks with various styles and patterns rather than surgical masks that evoke an institutional setting. Before COVID-19, there was no stigma associated with mask wearing in Asian cultures and there could be a stigma if someone who was sneezing or coughing was seen in public without a mask.


When cases of COVID-19 appeared in the United States, the first reaction of authorities was to discourage mask wearing by the general public. Various reasons were given for this guidance including the risk that people would wear masks incorrectly and actually increase their chances of contracting the virus if they touched their face with contaminated hands when putting on or taking off a mask. Additionally, the CDC and the World Health Organization both cast doubt on whether mask wearing would provide any protection for the person wearing the mask. This advice was in place for months after the virus appeared until the CDC finally changed its recommendation in early April.

It is important to note that there are two reasons to consider wearing masks in public:

  1. Wearing a mask might provide protection against contracting the virus for the wearer of the mask.
  2. Wearing a mask might provide protection for other people if the wearer of the mask is infected.

The motivation for the first case is to protect oneself from illness whereas the motivation in the second case is to protect others. While many people are public spirited and want to do the right thing to protect others, the reality is that nothing motivates more than self-interest. The conventional wisdom, and the opinion still expressed by experts, is that the homemade cloth masks and basic surgical masks commonly in circulation do not necessarily protect the wearer but could very well reduce the amount of virus in the air coming from an infected person.

While homemade and basic surgical masks do not necessarily provide protection, N95 respirator masks clearly do and have been in short supply in the healthcare system throughout the crisis. Due to the shortage of N95 respirators, the CDC currently does not recommend them for the general public, hoping that the limited supplies will be made available exclusively to the medical community. Being on the front lines of the epidemic, it is reasonable for national policy to seek to reserve important equipment for medical professionals.

However, in an attempt to discourage people from attempting to obtain masks early in the crisis, the government went far beyond simply making this case and urging people to not hoard N95 respirators. The government took it a step further and decided to discourage the use of all masks and to implicitly shame people into not wearing masks:

Using unprofessional language bordering on outright ridicule, Surgeon General Jerome M. Adams harnessed the principle of social proof by adding shame to the list of stigmas facing those who appear in public with masks.1 His statement was overly general, not differentiating between the types of masks, and made a blanket statement that masks are “NOT effective”. And the statement was plainly false. N95 masks, when properly used, do reduce the risk of contracting COVID-19. Cloth masks and plain surgical masks do reduce the amount of virus in the air when an infected person wears such a mask, even if such masks do not necessarily protect the wearer from contracting the virus.

As a result of the Surgeon General’s irresponsible statement, let us revise the list of things that might have crossed your mind if you saw someone wearing a mask on February 29:

  1. This person has a contagious disease and I need to stay as far away as possible.
  2. This person is seriously ill with a compromised immune system and I should stay as far away as possible.
  3. This person is paranoid or eccentric and I should not make eye contact and stay as far away as possible.
  4. This person is selfish. It won’t work and reduces the supply of masks for healthcare workers.

The end does not justify the means in a democratic society, or indeed in any society. Half-truths and outright false statements, even if made in an effort to help some perceived greater cause, are never acceptable. Trust in government and in figures of authority is essential if people are to comply with laws and policies. Instead of cynically manipulative statements leveraging psychological principles like social proof, government officials should level with the American people. The Surgeon General and the CDC could have acknowledged the fact that properly worn N95 respirators offer protection but that it is in all of our interests to ensure that health care workers are protected so that the system we all rely on when we are sick does not collapse. At the same time, they could have stated that wearing homemade or simpler surgical masks could be a responsible choice to protect others if you are an asymptomatic carrier.

Social proof is a powerful psychological force and it is well understood by individuals in business and government. By adding shame to the already long list of barriers to mask wearing, the government delayed the widespread adoption of masks in the United States by well over a month. My own anecdotal observation was that mask wearing was virtually non-existent in late February but widespread by mid-April.

To be sure, not everyone was wearing masks correctly in April and very few of the masks appear to be the N95 masks that are in short supply, but the norms of society have clearly changed. By late April 2020, the situation had flipped entirely. Seeing someone wearing a mask in places like a grocery store became the norm. And if you saw someone without a mask, you might think:

  1. This person is irresponsible and thoughtless. I want nothing to do with them.
  2. This person could be infected and spreading the virus. I need to stay far away.

The stigma flipped and social proof was now a force that encouraged mask wearing in public and this was done voluntarily. Probably many people decided to start wearing masks hoping to protect themselves but I suspect that many more simply wanted to be perceived as responsible citizens. More and more articles started appearing indicating that masks work to slow the spread of the virus further reinforcing this change of behavior.


The final cost of the COVID-19 pandemic both in terms of lives lost and economic harm will not be known for some time. Although the pandemic should not be considered a “black swan” event, it qualifies as a very unlikely event that few saw coming. Mistakes are bound to be made in such a situation by governments, businesses, and individuals. At some point, we will be in a position to identify the key mistakes that were made and hopefully learn from them.

As of May 4, 2020, nearly 70,000 Americans have died of COVID-19. The Federal government has appropriated well in excess of $2 trillion to deal with the initial economic turmoil, private businesses have suffered severe harm, and we are probably only at the end of the beginning of the pandemic rather than the beginning of the end.

When the final assessment is made, the stance of the government with respect to masks is very likely to face much deserved criticism. Masks are not a panacea and in an open society like the United States, we were always likely to face a greater toll than in countries that imposed more stringent restrictions. However, there was ample evidence to suggest that mask wearing could help at the beginning of this crisis.

Due to a shortage of personal protective equipment in the medical community, the government rightly wanted to reserve the most effective N95 masks for medical professionals, both for their own sake and to ensure that the medical system would not collapse. However, by making overly broad statements that not only questioned the effectiveness of masks in general but attached a stigma to those who wore them, the government hindered adoption of homemade masks and simple cloth coverings for well over a month. How many more cases of COVID-19 did we suffer as a result? This is impossible to know with precision but we can make inferences based on the countries that adopted masks sooner. Those in government who were responsible for the cynical use of social proof with respect to mask wearing should be held fully accountable.


  1. Note that the link in the Surgeon General’s tweet now states that cloth face covering should be used. The link did not make that statement on February 29 and recommended that the general public NOT wear masks. See this link for what the page looked like when the Surgeon General tweeted on February 29. []
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