Tulips, dotcoms, and the weak human mind: Herding mentality
Endowus Insights

Tulips, dotcoms, and the weak human mind: Herding mentality

Updated
October 19, 2021
published
January 12, 2018
.
"In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule."
  • Friedrich Nietzsche

We've all been guilty of being FOMO (also know as Fear of Missing Out). We see a long queue outside a shop and we quickly get in line before asking the person in front of us, "Eh boss, this line for what ah?"

Herding mentality is etched into our homo sapiens bones and has consistently shown itself throughout history. There was the tulip mania in the 17th century, when the prices of tulips skyrocketed and the Dutch even started mortgaging their houses to buy them. Unfortunately, this was only ridiculous in hindsight when the bubble burst.

Even if history doesn't repeat itself, it most certainly rhymes. During the heydays of the dotcom bubble, tech IPOs would double on the first day of trading. Anyone with an idea starting with "www" could raise money, until a trillion dollars in value evaporated from the Nasdaq in less than a month.

Psychologists say there are two reasons we tend to follow the crowd ?social pressure, and belief that the collective wisdom of the masses must be superior to our own. While it is tempting to follow the latest investment fads, we have to be careful not to fall into the trap of herd mentality.

Warren Buffett says,

"Be fearful when others are greedy, and greedy when others are fearful."

But we are socially conditioned to follow the crowd, and herd behaviour has been proven to intensify during bubbles and financial crises. We are unlikely to ever find a "cure" for our herding bias, but we can try avoid the major pitfalls by being aware of our natural tendency to adopt it, and taking a disciplined and long-term approach to investing.

More on this Tag
No items found.

Table of Contents