As individuals, we all like to fit in. We feel safe being part of the community and doing what everyone else is doing. Or is it? What if it was just the danger of wearing a mask.

For most of us what others are doing makes us feel comfortable and at ease with our decision. Not everyone can be wrong at the same time. Correct? Well, they might not be right.

Herd mentality is behavior that has to do with what others are doing. We don’t have to go looking for the herd mentality as it is very evident in everyday life. Imagine that you are in a street with food stalls. Which stall would you choose? Most of us will go for the stall which is overcrowded because we believe that they should be the most popular.

Let’s say you are attending a seminar and the instructor asked a question. You have the option to select option 1 or option 2. If we’re not 100% sure of the answer, most of us are going to go for the option where the maximum number of hands are in the air.

These two scenarios are nothing but examples of herd mentality.

Investors are also prone to herd mentality. In the case of investing, the herd mentality is the tendency of investors to follow what other investors are doing. Here, the analytical and technical skills of investors take a back seat and their decisions are governed by emotions.

That’s how most investors get it wrong. It is almost always better to avoid the herd. After all, Warren Buffett can’t be wrong when he said, “Be afraid when others are greedy and be greedy when others are afraid!”

What is the cause of herd mentality?

Studies have shown that going against the crowd can be emotionally or psychologically overwhelming for investors. Taking the opposite stance creates fear in the minds of investors. They assume that they are doing something wrong and do not want to be seen as a fool in front of others.

Peer pressure is another driving force of the herd mentality. From our school days to our adult lives, peer pressure continues to affect us. Going out is painful and no one wants to go through it.

Since most investors are taking a specialized course, it is difficult to understand how each investor can be wrong. This is another reason behind the herd mentality.

Novice investors are more likely to fall prey to the herd mentality, as it is most likely that they have not tasted the negative effects of following the crowd.

How not to fall for the herd mentality?

Keeping emotions under control helps a lot in the investment journey. Here are some ways that will help you avoid herd mentality.

ResearchResearch is the first step that every investor should take. Adequate research will help you find out the right investment option. It will also help you to avoid wrong stock. As a result, you won’t be tempted to jump on the latest hot stock or investment option.

There are people who will question your decisions: As an investor, we make emotional decisions because we are not able to take an objective view. Being close to people who can help us take an objective approach is a blessing indeed. They can help us challenge and question the priorities that help us make rational decisions.

Take a Financial Advisor: If research is not your cup of tea, you can enlist the help of a financial advisor to help you choose the right investment option for you. He will help you guide you better than your friends and colleagues.

Conclusion: The herd mentality is common among investors. Sometimes following the crowd can lead to making the wrong decisions. Therefore, it is important to make rational decisions. You can avoid bias by doing research, creating an intimate support group, and enlisting the help of a financial advisor.

Views are personal: The author – Mr. Kapil Holkar is the Founder & CEO of Bhopal Equation

Disclaimer: The views expressed are those of the author and are personal. TAML may or may not subscribe to it. The views expressed in this article/video are in no way intended to predict or time the markets. The views expressed are for informational purposes only and do not imply any investment, legal or taxation advice. Any action taken by you based on the information contained herein is your sole responsibility and Tata Asset Management will not be liable in any way for the consequences of such action by you.

Mutual fund investments are subject to market risks, read all the documents related to the scheme carefully.

Disclaimer: Content Produced by Tata Asset Management