Why The Crowd Is Always Wrong
Edited By Jeff Greenblatt
Did anyone see Primetime Live last Thursday evening? They actually began to do some basic studies on mass crowd psychology and the herding principle. They went all the way back to the 1950s to show a spoof Candid Camera once did. In this gag, a man enters an elevator where EVERYONE is turned facing the back. Not wanting to be different every person who entered that elevator conformed and turned facing the back. In controlled studies, they had a group of individuals who were shown a series of puzzles where 5 out of 6 people were given the right answer. What they attempted to do was determine if the test person can figure out the right answer. It was an oral test and in every case, the crowd gave the same answer. In every case, the test person gave the same answer as the others in the group regardless if it were right or wrong or if the person thought a different answer correct. Against their better judgment, the test people gave the same answers as did the crowd.
These basic experiments were designed to show how instinctive the herding impulse is. As a matter of fact, in another experiment the test person was hooked up to a machine that exhibited which areas of the brain were active in the decision making process. What they found was when an individual made a decision NOT TO CONFORM, his amygdala lit up, which was indicative of stress and anxiety.
Is it any wonder we have such trouble with financial markets? This is why it is so hard to go against the crowd. We, as human beings are actually wired NOT TO SUCCEED when it comes to trading and investing. That's why when you pull the trigger on a trade that works out, its usually an uncomfortable feeling. If you feel comfortable making the trade, odds are you've joined the crowd and are probably wrong.
This instinct to conform explains performance in financial markets as well as other areas of life. Here are a few examples:
1) In a motivational seminar, 2000 people were told to burn a hundred dollar bill as an exercise in abundance training. The logic being that if you are willing to burn the bill, unconsciously you know there is a lot more of that. What would YOU DO?
2) In the 2004 tsunami many went out to the water when the wave receded. Others ran. Very few opted for HIGHER GROUND. Those who did, likely survived.
3) In the Vietnam era, did you or would you have gone to Canada? Mind you, I'm not placing any political judgment on your decision. What you would have done shows whether you were willing to go against the crowd. Some did and some did not. Some believed in the war and some did not.
4) In Nazi Germany, it was ILLEGAL to be Jewish. The question is whether you would have been willing to go against the crowd and risk your life to save innocent people. Or, would you have been brainwashed and accepted the mass psychology of hate? Once again, no judgments as decent minded people who would NEVER do such things individually suddenly get stupid when the herding principle takes over.
5) Finally, if you got in an elevator where everybody was turned to the back, what would YOU DO?
These situations demonstrate both simple and extreme circumstances and the answers will show to what degree of pain a person is willing to put up with to either conform or go against the crowd.
As far as the markets go, only you know what you believe the market will do at any given point in time. The question is do you have a methodology that allows you to make independent decisions or are you listening to what they say on CNBC?
