To be in the majority - that is, a few words about the crowd phenomenon

Every novice investor or speculator has once again met with the old stock exchange wisdoms "Do not succumb to the majority", "Do not follow the crowd"or with a typical counter-clarian approach "Act against the opinion of the majority". In fact, we are often unable to determine which side we are on the right when making decisions about opening positions or closing them. Bearing in mind the above and knowing the spectacular crowds fever (even the famous tulipanomania of 1634) I present below a few psychological aspects of succumbing to the proverbial majority.

Kwhat can we call a crowd?

From the average perspective Kowalski it is a gathering of many people, not penetrating the reason that united them. However, from a psychological point of view, the crowd only appears when the feelings and emotions of the units are consistent. Of course, we're interested in the second model. Many times in the literature on the stock market I found a classic, even a book example of collective loss of reason. They are tulip bulbs that in the 17th century mastered the primitive (yet) Dutch stock market to such an extent that the price of one, rare variety was equivalent to the ten-year salary of an average worker.

The episodes associated with feverish investing or speculation on given assets, of course, were definitely more. Usually crowd theory is used to describe the formation of a speculative bubble. In order to be able to understand the majority, it is worth focusing on the general but basic features of investment frenzy that the authors of historical analyzes have been looking for over the years.

Without penetrating directly into the models (there are really a whole bunch of them), three characteristic points stand out. These include: a sense of strength, infection and susceptibility to suggestion.

A sense of strength

It is nothing else than a driving motor that gives the "invincible" power to the crowd. The sense of strength leads to relying on emotions and an instinctive approach (on premonition), which under normal circumstances would be subjected to rational analysis. Its members, thanks to their anonymity, lose their sense of responsibility at the same time. A great example of this is the fans hitting the pitch after winning the match. How does this mechanism work on the market? The answer is essentially simple ... after all, most are always right and never wrong.

Contagion

This typically medical term perfectly replicates the moment of "transferring" emotional states, ideas or influences to a spontaneously acting crowd. Reading, among others, the book "Unusual illusions and feverish crowds" this stage is comparable to hypnosis. Observation of recommendations, listening to broker's directions, "24-hour" observation of charts and tracking its fluctuations, or conversations with other market participants confirming our assumptions act as a pendulum of the hypnotist.

Susceptibility to suggestion

The most peculiar feature of the psychological crowd is the fact that a person, regardless of their beliefs, intelligence, character or profession, becomes an element prone to behavior contrary to their own interests. It seems to have no logical justification. Similarly to an investor holding a position bringing increasing losses. Susceptibility suggests why people (potential speculators) do things they promised not to do or ignore the ones they intended. What can be the golden advice? I do not think there is a holy Grail. The only right suggestion is to take outside sources of opinions, among others, recommending and avoiding in the long-term markets with a temporary "popularity".

The crowd, as a collection of anonymous individuals who are excited about and hijacked by the usually overvalued market, is an interesting point that can be enriched not only by the fundamental approach to analysis. Recognizing its features and understanding the mechanisms of action is an invaluable advice on how to avoid emotional and ill-considered decisions.