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Money Matters: The Herd Mentality

We humans generally pride ourselves on our individuality but in reality, we are just as susceptible to herd mentality.

by / Published: 15 Feb 2017

Money Matters: The Herd Mentality
Photo: iStockphoto

Tom Henson is a senior consultant with Infinity Financial Solutions and one of KL's most sought after financial planners. Married with a young son Tom enjoys family life and is an ace on the golf course.

In the wild, animal packs survive by travelling, feeding and hunting together. This hard-wired herd mentality offers safety and anonymity to an animal. Although the weakest members of the pack are often picked off by predators or abandoned, the chances of survival for each individual group member, is increased by being part of the herd. We’ve all seen the footage of thousands of wildebeest crossing rivers teeming with crocodiles as they migrate. By traversing the river in huge numbers, most manage to get across unscathed with just a tiny percentage of the beasts unfortunately ending up as dinner. Any animal crossing alone wouldn’t have a hope in hell, of escaping the snapping jaws of so many hungry reptiles.

We humans generally pride ourselves on our individuality but in reality, we are just as susceptible to herd mentality as the wild beasts of the animal kingdom. There are numerous examples of how we follow the crowd without stopping to think, or realising what we are doing. The actions of fashionistas and football fans alike demonstrate the degree to which we are influenced by our peers to follow trends or behave in a certain way. How else could we explain the prevalence of the hipster beard in 2015 whereas no self-respecting man would have deemed facial hair acceptable, just a few years ago? Or to understand what makes ordinarily rational football fans cover themselves in facial paint and stand half-naked in a crowd chanting on a Saturday, when the rest of the week they don a suit and go about their business in a totally rational way?

Although the human tendency to follow the crowd is not generally a question of life or death, it is thought by psychologists to stem from the same survival instinct that drives animals. However when it comes to investing, going with the flow is certainly not going to make you rich and is more likely to hasten your financial extinction than to ensure your survival. Amateur investors are often on the lookout for cues from the experts as to when to purchase, or offload stocks and follow blindly where the pros lead. The problem is that by the time these cues have filtered down, the horse has already bolted and these herd-driven investors often find themselves buying at the top of the market or selling at the bottom of the market – both worst-case scenarios.

The dotcom bubble of the 90s provides a textbook example of how the herd mentality can be catastrophic in the financial world. Rooky investors, driven by greed, flocked to have their piece of the action in this brave new world, emboldened by the bravado of dotcom success stories such as lastminute.com, were willing to risk enormous sums of money on companies which often consisted of nothing more than a young, geeky entrepreneur with an idea, a catchy name and a talent for courting the media. Lastminute.com survived the bubble, despite the company losing almost half its value within three weeks of floating on the stock market, but other high-profile companies did not fare so well. Online fashion retailer boo.com famously powered through $135m of investment in the 18 months after its launch in 1999 but was bankrupt by the end of the following year! Those that believed the hype and invested in failed ventures such as this got their fingers well and truly burned.

Chasing fast returns based on what others are doing is not a sound investment strategy. As an über-investor, Warren Buffet, has warned “Be fearful when others are greedy and greedy when others are fearful”. While he might be experienced enough to go against the herd, inexperienced investors would be wiser to take a more measured approach to investment. A well-researched and diversified portfolio which will ensure consistent long term returns, according while limiting your exposure to risk is the way to go. While this is not a strategy which will provide thrills and excitement, it will ensure that your savings are growing steadily, keeping them safe from the snapping jaws of failed investments and ensuring your financial survival.


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