Since the beginning of time, we as Homo Sapiens have been programmed to stick together as a crowd in order to survive. Even before we evolved into what we are today, our ancestors such as Homo Heidelbergensis and Homo Erectus hunted in groups as they instinctively knew that they would cope better as a unit rather than individually. (Finally, a use for my Archaeology degree!)
Even though nowadays we do not have to hunt for our food to survive, this does not mean that we don’t unconsciously follow the crowd, and this is still evident in our modern-day society. One area where behaviour and this instinct is prominent is in investing.
Its in our nature to follow the crowd and this is called the Herd Instinct. This is the commonly used term to explain how investors follow trends rather than doing their own research, as they believe the research has already been done. This ultimately leads to panic buying and panic selling.
The fear of missing out on a profitable investment idea is often the driving factor behind the herd instinct.
Much like in the Lion King where Scarr’s hyenas startled the wildebeest and killed Mufasa, the actions of panic selling can be triggered from one event and one individual selling that escalates into everyone selling in a frenzy. These sell events normally have no justification.
Because this behaviour is entirely instinctual, those who don’t submit to it can often feel distressed. This leads to an investor feeling like they have made a big mistake if they don’t follow the crowd and sell off a certain stock.
Behavioural finance theory attributes this to the natural human tendency to be swayed by society which then triggers the fear of being alone or the fear of missing out. We’ve all experienced FOMO (fear of missing out) right!
The tips for avoiding the herd instinct in investing are:
- Stop looking at what everyone else is doing
- Do your OWN research
- From that research develop your own opinions and seek financial advice!
We would always recommend that you seek financial planning advice if you are looking to invest. Please do not hesitate to contact us if this is something you are thinking about on 01482 219325 or email [email protected].
By Rachel Naulls, Senior Paraplanner.
Risk Warning: The value of your investments can go down as well as up, so you could get back less than you invested.