According to Capital.com, the Herding Bias “also known as the ‘bandwagon effect’, is a psychological phenomenon in which people rationalize that a course of action is the right one because ‘everybody else’ is doing it. In the world of investment, this can take the form of panic buying or selling. Herd behavior is part of human nature and is often discussed as a cause of investment bubbles. A good example would be the dotcom boom of the late 1990s, when people continued feverishly investing in internet companies, despite the fact that many of these start-ups were not financially sound.”
The folks at Investopedia take it to the next level and describe the Herding Bias as: “A behavior wherein people tend to react to the actions of others and follow their lead. This is similar to the way animals react in groups when they stampede in unison out of the way of danger—perceived or otherwise. Herd instinct or herd behavior is distinguished by a lack of individual decision-making or introspection, causing those involved to think and behave in a similar fashion to everyone else around them.”
At Nepsis®, we would suggest that because investors, in most instances, have no idea as to what they own and why they own it, they therefore have nowhere to turn other than where the masses are pivoting at any point in time. The big question is, what is the remedy to actually doing what is in your own particular best interest vs. that of the crowd? Our answer would be wrapped up in one word and that is Process!
A disciplined process that encompasses the four keys to successful investing includes a sound Philosophy and a structured Strategy that allows for unfettered Flexibility and ultimate Transparency. These are albeit formal words and encompass depth and complexity but really lead to investor freedom in the decision-making process. Think about how the folks at Investopedia stated that the root cause of the Herding Bias is distinguished by a lack of individual decision-making or more aptly “Introspection.”
If one has ultimate Clarity garnered via a disciplined process, it brings with it a confidence and an unshaken ability to execute a strategy with underpinnings rooted in deep conviction. This allows the investor to have the Clarity to look fear directly in the face and scoff at the masses who can do nothing more than follow the herd. Clarity is the elixir to almost every bias but most specifically Herding Bias!
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