Herd Mentality And Crowd Psychology

Markets are made up of many participants reacting to each other as much as to underlying information. Herd mentality is the tendency to follow what the crowd appears to be doing, on the assumption that many people acting together must be right.

Where It Comes From

Following the crowd feels psychologically safer than standing alone. If a trade goes wrong while everyone else was doing the same thing, it can feel less personal than a decision made independently. This safety is often illusory — being part of a crowd does not reduce the actual financial risk of a position.

• Entering a popular trade mainly because chat rooms or social media are excited about it
• Selling into panic simply because visible commentary has turned negative
• Assuming heavy trading volume or attention automatically means a move will continue