Wisdom Of Crowds Isn’t Always Wise To Follow

The “wisdom of the crowd” isn’t always wise to follow. A recent article by Scott Nations via MarketWatch made an excellent point.

“It’s easy to become anxious as an investor. It’s particularly easy to become anxious when war is erupting in Europe, stock markets are gyrating, inflation is spiking, and the Federal Reserve is raising interest rates to snuff out that inflation.

So what do many investors do in times like this? While we like to think that we’ll be rugged individualists and go our own way, too often we reflexively look around to see what everyone else, the great lowing herd of investors, is doing. And then many of us will join that herd.”

What is herding?

“The term herd instinct refers to a phenomenon where people join groups and follow the actions of others under the assumption that others already did their research. Herd instincts are common in all aspects of society, but particularly within the financial sector. Investors tend to follow what they perceive other investors are doing, rather than relying on their own analysis.” – Investopedia

According to a C.F.A. Institute survey of investment practitioners globally, 34% stated that the “wisdom of crowds” or “herding” was the most significant contributor to investment decision-making.

Wisdom Of Crowds, Wisdom Of Crowds Isn’t Always Wise To Follow

The top rank for herding is a reminder of the lemming suicide myth in which lemmings end their lives by following one another off a cliff. However, before they can see the cliff’s edge, they believe the “wisdom of the crowd” in front of them knows where it’s going.