It’s easy to become anxious as an investor. It’s particularly easy to become anxious when war is erupting in Europe, stock markets are gyrating, inflation is spiking, and the Federal Reserve is raising interest rates to snuff out that inflation.
Herding increases whenever the mental energy required to process whatever the market is doing is higher than normal, as it would be during a bear market. It is then easy to believe that other investors have things figured out, that they’re not confused. Anxious investors imagine those other investors are better informed, or better able to make sense of the volatility and competing market narratives.
John Maynard Keynes, probably the best known economist of all time, described the damage herding can do in the understated manner of an academic when he said, “There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable.”
The same has happened more recently with ‘meme’ stocks like GameStop GME, +7.48% and AMC Entertainment AMC, +6.28%, which despite its purported focus on entertainment recently announced inexplicable plans to plow some of that “meme money” into buying a major stake in a small, financially dubious gold miner.
One reason herding is so expensive is because it limits an investor’s alternatives to those they see others using. Herding can be doubly expensive because it occasionally seems, in retrospect, to have been the correct course of action. But this is another behavioral bias, a trick we play on ourselves because we tend to remember when things worked out – like bailing out of the stock market immediately after one of just four remaining U.S.
Same thing happens on the way up.
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