Herd mentality on investing

Do own research and stay away from the herd

Herd Mentality, or the Bandwagon Effect, is one of the most prevalent phenomena that lead investors to different investing decisions. Investment decisions based on herd mentality are essentially based off the notion that, “everyone else is doing it, so why not.”

Herdism, as some might refer to it, is almost innate to human nature, not just in the context of financial markets, but throughout the spectrum of the human decision making process. In the investing world, retail investors are more likely to make decisions based on herd mentality than professional investors. However, professional investors do also fall prey to herd mentality, especially when there are some significant market events.

WHY IS HERDISM SO POPULAR?

First of all, there is comfort in crowds. Oftentimes, making a decision that is contrary to the crowd, is a very lonely place to be. Because of that, we will quite often neglect rational decision- making and just follow the crowd. Also, it is easier as it does not require you to spend any time researching or rationalising your decision. You can simply say you did something because your neighbour did it. Herdism also gives an illusion of superiority. We tend to believe that if the masses subscribe to a particular decision, or way of life, or trend, that in itself justifies the decision and makes it the right way to do things. This is how a culture is gradually adorned; further, blending into what the crowd does, lends the false illusion that it is the superior way of doing things. Being a standout can be quite a lonely place to be, wherein you have to put up with potentially being ridiculed or criticised by the masses. Why does herdism not work in investing? Most retail ( or non- sophisticated) investors are emotional, trend investors. And unfortunately, a lot of retail investors buy into whatever glitters. While this approach might work for buying household items or clothes shopping, it is quite hazardous when investing your hard earned cash.