Why the “Bandwagon Effect” Is a Smart Investor’s Worst Enemy

Your “FOMO” will cripple your investing profits.

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Photo by Perry Grone on Unsplash

In this article, we’ll cover the bandwagon effect, a cognitive bias that’s gotten much worse in our age of social media.

Author’s Note: This article is part of my series on investing psychology:

The Bandwagon Effect — What is it?

The bandwagon effect is the tendency of investors to do or believe things because many other people are doing or believing the same thing.

How does the bandwagon effect apply to investing?

Also known as “groupthink” and “herd behavior,” the bandwagon effect can be seen when investors put too much faith in what other investors are doing and decide to simply follow along.

Some might even call it investing FOMO — fear of missing out.

For example, investors may all crowd into a hot stock or industry because there’s so much buzz and excitement around it.

Another place the bandwagon effect can be seen is when investors sell out of stocks because they think a crash is imminent or buy into stocks because they think a big rally is about to begin.

Interestingly, this type of herding behavior is often seen when investors rush to buy stocks at the market’s peak or rush to sell stocks at the market’s bottom.

Of course, logic would suggest they should do the exact opposite.

This type of herding behavior is driven more by shared group excitement than by relevant data or logic.

What should you do instead?

Put simply, try to base your decisions on data and logic. That tends to be a more reliable source of smart decisions than simply following the herd.

It’s fine to observe the herd, if only to learn how others are thinking. But trust your own research and experience, don’t just jump on the bandwagon.

Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. All information is obtained from sources believed to be reliable but cannot be guaranteed for accuracy or completeness. Use this information at your own risk.

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