How groupthink affects investment returns

Herding is in evidence all around us: in business, in the consumer world and particularly in investing. But why does herding happen? And why do herds often form on the basis of such little information? The answers can be found in something called social proof. Social proof is when people follow the actions of others in an attempt to reflect the “correct” behaviour for a given situation. Social proof is the underlying psychological bias that results in what we recognise as “groupthink” behaviour. When stock markets are falling, there is a strong pull on our emotions as social proof encourages an urge to sell if we see others doing so. Do they know something we don’t? The evidence from behavioural finance suggests the answers to these questions could be surprisingly irrational – that people sell because others are selling. In the full article below, we discuss how large forced sellers can trigger herd behaviour. (VIEW LINK)