Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Group Socialization Theory? What?

By Louis Corrigan (TMFSeymor)

ATLANTA, GA (July 8, 1999) -- Consider this a day trip, though hopefully an interesting one.

In his Nobel prize winning novel Lord of the Flies, William Golding told the story of how a couple of dozen British schoolboys, left to their own devices on a tropical island, revert to a kind of prehistoric barbarism, ultimately killing those that don't fit in. The horror, the horror!

But psychologist Judith Rich Harris argues, "Golding got it all wrong." Not the killing, necessarily, but the way it happens. In the novel, the boys divide up into the growing party of long-haired savages dominated by Jack, on the one hand, and on the other, the few boys who don't fit in with Jack's rule: the reasonable Ralph, who is nearly killed, and the bespectacled Piggy and strange Simon who actually are killed.

What bothers Harris is that Golding misconstrued how groups actually work. If you end up on a strange island with a bunch of boys, you're likely to stick close to the ones you already know. Or, you're likely to form friendships with the ones with whom you share a common background, like boarding school life back in England. Yet, in the novel, some of the members of Jack's choir group initially follow Ralph. Moreover, Golding has the little boys playing in their own groups, ignoring the older boys they would look to for direction and approval.

None of it would have happened that way. "The boys might have come to blows and even to bloodshed, but it wouldn't have been group against individual: it would have been group against group," Harris asserts.

The discussion comes from Harris's The Nurture Assumption: Why Children Turn Out the Way They Do (1998), a book that challenges decades of research in the social sciences and that leading psycholinguist Steve Pinker has hailed as "a turning point in the history of psychology." What it argues, in a nutshell, is that psychologists have overemphasized the influence of parents on children and thus missed the fact that peers actually have a greater impact on a child's development --a notion Harris has dubbed "group socialization theory." In other words, the "nature vs. nurture" dichotomy is inherently misleading. It would be more accurate to talk about the impact of genes vs. the impact of the environment, broadly construed.

Harris writes in a witty and conversational style that befits a Fool. Her own story is classic Foolishness. In 1960, George A. Miller, chair of Harvard's Psychology Department, kicked Harris out of the Ph.D. program because he didn't think she had the right stuff. Stuck at home for years with chronic health problems, Harris became a writer of psychology textbooks -- until she realized she no longer believed what she was supposed to write. Too much evidence didn't fit the conventional wisdom. So she hatched her own theory to account for the problematic data that almost everyone was choosing to ignore. Ironically enough, her breakthrough 1997 article in Psychological Review won her the prestigious George A. Miller award!

Her analysis of Golding owes a lot to her appreciation of the way older children socialize younger ones. But it also follows from her understanding of what's called "group contrast effects," or the tendency to see juxtaposed categories as more different than they really are. From an early age, children develop partly by virtue of an us/them dynamic ("we're kids, not adults"). We are always part of many "us" groups, categories that become more or less salient depending on the setting. We also develop individualized roles within each of these groups.

But Harris argues that our us/them dynamic is (necessarily) so ingrained in us due to peer socialization that we'll latch onto any difference, no matter how inconsequential, to define ourselves as part of a group. "All it takes to produce group contrast effects is to divide people into two groups. The groups will inevitably see themselves as different from each other, with the result that any small differences between them will get larger."

Harris points to two instructive studies. In the 1954 "Robbers Cave" study, psychologists picked 22 boys from Oklahoma, all 11 years old, white, and Protestant. All had average to above average intelligence. None were fat, wore glasses, or came from a different part of the country. None knew each other prior to the study. Nor did they know they were participating in a study. The boys were divided into two groups of 11 and were shipped to the same summer camp in the mountains for three weeks. At first, neither group knew the other existed. The researchers planned to let each group coalesce for a week before sparking competition between them in week two and then uniting them in week three.

What actually happened is that the groups were eager to compete after just hearing the other boys playing in the distance. And the baseball games, tug of war matches, and treasure hunts in week two quickly led to fist fights. The groups were only brought together in week three when the researchers concocted an outside threat: someone supposedly vandalizing the camp.

Part of what was interesting, though, is that the two groups (self-named the Eagles and the Rattlers) quickly accentuated their minor differences. After the Eagles won a baseball game, one of the boys suggested it was because the Eagles prayed while the Rattlers cussed all the time. From that point on, the Eagles decided they would pray and not cuss. The Rattlers then became the bad boys. Yet before their interaction, each group of boys had prayed and cussed just as much as the other one. After all, the boys had been picked because they were all so much alike.

In a different experiment, a group of 14-year-old boys in Bristol, England, were asked to count the number of dots flashed in clusters on a screen. Some were then randomly told they had overestimated the number while others were randomly told they had underestimated. Thus each boy, by pure chance, became either an "overestimator" or "underestimator." And none of the boys knew which of their fellows fell into one group rather than the other. Yet, when asked to determine how much money should be paid to a member of each group -- and each boy was told the decisions wouldn't affect his own pay -- overestimators consistently overpaid their own group members and underpaid those in the other group. And vice versa. A seemingly meaningless group designation had shaped behavior.

How, you wonder, does all of this relate to investing? Well, I'm not entirely sure it does. Yet, the implications of Harris's analysis are so widespread and her arguments so fascinating (perhaps especially to parents) that I'm mainly just interested that you know about her book. Still, I do think her discussion of group dynamics reminds us of things that we know -- or ought to know -- but occasionally ignore.

For example, the distinction between Fools and the Wise is useful and seems grounded in more substantial differences than those characterizing the Eagles and the Rattlers. Yet, that doesn't mean that all the professionals on Wall Street or in the financial media are necessarily misguided (or that those who call themselves Fools are always more enlightened). The distinction is based partly on the idea that the conventional wisdom is often wrong and that a community of non-professional investors -- some the equivalent of stay-at-home moms like Judith Rich Harris -- may be a whole lot smarter than the so-called experts. And, ultimately, us Fools want to learn from them.

I also think that some of the most engaging stock message boards can sometimes produce a potentially dangerous dynamic resulting from group contrast effects. The bulls and the bears may come to a message board with meaningfully different perspectives. But why do the bulls come to dislike the bears so much, and vice versa? Each of us is an investor trying to analyze a company well enough to make money or at least avoid losing it. Metaphorically speaking, the best investors should be comfortable both praying and cussing in the same breath. The very idea that you can succeed in investing -- or in baseball, for that matter -- without doing a bit of both is just nutty.

In investing news... well, there wasn't much happening.

Trump Hotels (NYSE: DJT), the portfolio's sole short, got longer with a $1 5/8 gain (33%) to $6 5/8. Bloomberg reported late this afternoon that there's talk that the company's second quarter cash flow (operating earnings before all the bad stuff like massive interest payments) could come in higher than expected and that Trump may also refinance its debt. Also, Trump's World's Fair money pit in Atlantic City reportedly might be torn down and a new casino launched on this prime boardwalk real estate, perhaps in partnership with another firm.

The only other news worth mentioning was the negative "Heard on the Street" column on eBay (Nasdaq: EBAY) in today's Wall Street Journal. Some analysts are reportedly reining in their expectations for profits this year, with Goldman Sachs analyst Rakesh Sood saying the upside to estimates "may be limited in the near term." Still, he said eBay remains his top pick. A number of hedge funds, though, are reportedly shorting the stock, emboldened by last week's sequential decline in the number of auctions being conducted on the site, possibly a sign of increased competition from Amazon.com (Nasdaq: AMZN) and Yahoo! (Nasdaq: YHOO) The stock dropped $4 1/16 to $134 3/16.

Other Internet stocks rose, probably due to good vibes surrounding Yahoo!'s better-than-expected second quarter results, which were announced after the close yesterday. America Online (NYSE: AOL) jumped $2 11/16 to $127 11/16 while Amazon gained $3 1/2 to $125 3/8. Those gains helped make up for weakness in our Dow stocks, allowing the Rule Breaker to bounce forward 1.98%, handily outpacing the Naz and the S&P.

Radio Show Contest: The Motley Fool Radio Show message board is hopping with contributions for our financial parodies contest in honor of Weird Al Yankovic's appearance on the program this Saturday, July 10. The posts are hysterical. Don't miss them. And see this link for details on how to enter the contest. You could win a one-year subscription to The Motley Fool Monthly, our newest print publication, plus a Fool ballcap, T-shirt, and a copy of Weird Al's new CD.

07/08/99 Close
Stock  Change    Bid 
------------------ 
AMGN  +2 13/16   65.63
AMZN  +3 1/2    125.38
AOL   +5 3/16   127.69
ATHM  -  1/8     54.81
CAT   -  15/16   61.19
CHV   -1 9/16    98.13
DD    -1 7/16    68.50
DJT   +1 5/8      6.63
EBAY  -4 1/16   134.19
GT    -  3/8     57.94
IOM   -  1/16     4.44
SBUX  -  3/8     24.63
TDFX  -  1/16    14.88


             Day     Month  Year   History   Annualized 
      R-BREAKER  +1.98%   4.31%  34.19% 1246.91   69.60%
        S&P:     -0.10%   1.57%  14.02%  218.45%   26.53%
        NASDAQ:  +1.05%   3.19%  26.41%  284.88%   31.49%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    127.69   13949.35%
   9/9/97  1320 Amazon.com     6.58    125.38    1805.61%
  5/17/95  1960 Iomega Cor     1.28      4.44     246.57%
  12/4/98   900 Excite@Hom    28.04     54.81      95.48%
 12/16/98   580 Amgen         42.88     65.63      53.06%
  2/26/99   300 eBay         100.53    134.19      33.48%
  2/23/99   300 Caterpilla    46.96     61.19      30.29%
  2/23/99   180 Chevron       79.17     98.13      23.94%
  4/30/97 -1170*Trump*         8.47      6.63      21.77%
  2/23/99   290 Goodyear T    48.72     57.94      18.93%
  2/20/98   260 DuPont        58.84     68.50      16.41%
   7/2/98   470 Starbucks     27.95     24.63     -11.91%
   1/8/98   425 3Dfx          25.67     14.88     -42.05%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 280912.50  $278913.03
   9/9/97  1320 Amazon.com  8684.60 165495.00  $156810.40
  12/4/98   900 Excite@Hom 25236.13  49331.25   $24095.12
 12/16/98   580 Amgen      24867.50  38062.50   $13195.00
  2/26/99   300 eBay       30158.00  40256.25   $10098.25
  5/17/95  1960 Iomega Cor  2509.60   8697.50    $6187.90
  2/23/99   300 Caterpilla 14089.25  18356.25    $4267.00
  2/23/99   180 Chevron    14250.50  17662.50    $3412.00
  2/23/99   290 Goodyear T 14127.38  16801.88    $2674.50
  2/20/98   260 DuPont     15299.43  17810.00    $2510.57
  4/30/97 -1170*Trump*     -9908.50  -7751.25    $2157.25
   7/2/98   470 Starbucks  13138.63  11573.75   -$1564.88
   1/8/98   425 3Dfx       10908.63   6321.88   -$4586.75

                              CASH   $9924.87
                             TOTAL $673454.87
 
Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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