“When the whole world is running towards the cliff, the one running in the opposite direction looks stupid”
For millions of years, herds have been a great mechanism to protect animals from predators. When a herd member spots a danger, he alerts the entire herd. While this mechanism has successfully protected us, it also hampered our rational thinking, courage to swim against the tide, and have an independent and rational thinking, crucial for successful investing.
Herd mentality is the tendency of an individual to mimic the actions of a larger group whether those actions are rational or irrational.
We fall prey to the herd mentality due to societal pressures, in order to be accepted by the group, we take decisions that we would not make on our own.
Herd behavior comes from madness of crowds, a rationale that if lot of people buy into a decision, the more likely the decision to be right. Even if an individual believes that the action is irrational or inadvisable, he or she is more likely to be swayed if others have already engaged in that behavior.
There are many examples of herd mentality from Tulip Mania, to Dot Com bubble, and from 2008 financial crisis to surge in price of bitcoin.
The best way to avoid being swayed by the greed and fear of the herd is to do your own home work and have an independent thinking no matter how different or contradictory it is from the popular opinion.
It takes a lot of courage to do that and it comes only with experience and making mistakes. Investors who steer clear of the herd and maintain their own independent strategies and investment principles are likely to avoid the heartbreak that can come with being involved in an investment trend gone wrong.