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The tendency to copy what other investors are doing, buying or selling mainly because everyone else is, instead of following your own plan.
Why It Matters
When a scary headline hits, it is natural to look around and do what the crowd is doing. That instinct kept our ancestors safe, but in markets it can amplify moves: fear feeds selling, which feeds more fear. Understanding the herd instinct is the first step to noticing when a decision is coming from a plan versus from the crowd.
Key Points
- Crowds can push prices further than the news alone justifies, in both directions
- Following the herd often means buying near highs and selling near lows
- A written plan is the simplest defense against acting on crowd emotion
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Common Questions
The tendency to copy what other investors are doing, buying or selling mainly because everyone else is, instead of following your own plan. When a scary headline hits, it is natural to look around and do what the crowd is doing. That instinct kept our ancestors safe, but in markets it can amplify moves: fear feeds selling, which feeds more fear.
When a scary headline hits, it is natural to look around and do what the crowd is doing. That instinct kept our ancestors safe, but in markets it can amplify moves: fear feeds selling, which feeds more fear. Understanding the herd instinct is the first step to noticing when a decision is coming from a plan versus from the crowd.
Crowds can push prices further than the news alone justifies, in both directions
Following the herd often means buying near highs and selling near lows
A written plan is the simplest defense against acting on crowd emotion