This is what “hype” looks like:
The rumor that NOW TELCO will be the third Telco of our country send this stock into a frenzy. Everybody talks about NOW stock. Sa News Channel, sa Forums, sa Facebook even sa Jeepney. Some of you might remember those times. Those were crazy times right?
We call it “HYPE” but it’s actually Herd Mentality or Herd Behavior. It’s the tendency that people have to mimic or emulate the actions of other people in a large group. Sometimes, herd mentality stems from copying the actions of people of high status, but often, herd behavior is the result of going with the crowd.
According to Value Stock Guide there are two main explanations for herd mentality. The first is social pressure, also known as the dreaded peer pressure! Humans are social creatures and want to be accepted by the group, not excluded for being an outcast. Thus, we often choose to follow what everyone else is doing as a means of acceptance. Remember, herd behavior is not generally the result of a conscious choice. Even iconoclasts, hermits, and introverts are subject to social pressures beyond their control. The second explanation for herd mentality is the “How could so many people be wrong?” rhetorical question that advertisements are so fond of. Popular logic dictates that if so many people are doing something, it must be the right thing to do. Surely, not all of those people would be wrong? In fact, everyone could be wrong. It’s a little scary to think about, but there are plenty of situation in which no one really knows what he or she is doing. The caveat to this sort of thinking is that individuals with more experience are less likely to fall prey to it; it’s the people with very little experience in a field who are most likely to exhibit herd behavior on the basis of “everybody’s doing it.”
According naman sa Zacks, Herding behavior in the stock market can take three forms. Information-based herding happens when everyone reacts the same way to announced information. Reputation-based herding is caused by a respected investor or major trading house taking a specific trading stance. Compensation-based herding occurs when certain conditions prompt large institutional money managers to take profits, generally to protect fund earnings before year-end reporting. These behaviors create large volume in certain stocks or sectors that are popular institutional portfolio investments, prompting those watching to react quickly.
If isipin mo talaga humans are hardwired to think and act like a herd. Nobody wants to be an outcast. No body wants to be alone. We tend to dress the same, follow the same path (school, college, job etc..) and talk the same (slang). In real life there’s nothing wrong with blending in and being a part of a large group. But it trading it can be disastrous. Remember KPPI? That was a great trade to some and a disastrous trade to many. Marami pa rin until now mataas ang average sa KPPI. Herd instinct in finance is the phenomenon where investors follow what they perceive other investors are doing, rather than their own analysis. Herd instinct is a mentality that is distinguished by a lack of individual decision-making or introspection, causing people to think and behave in similar fashion to those around them. The fear of missing out on a profitable investment idea is often the driving force behind herd instinct.
Herd mentality sa stock market can be divided into two parts. Isa yung nagchachase ng momentum at isa naman yung nagpapanic. In a class, every other guy has this hobby of collecting marbels. Everyone was simply crazy for the marbles. Ben was one such guy who has a very unique marble. The one that was unusual due to its white color. Soon, the news spread like a wildfire that Ben has a unique marble. Everyone hence wanted to own that white marble. There were guys ready to exchange as many ordinary marbles they could to get that one white marble. Ben started buying more such white marbles from his secret source to exchange it. Soon, everyone in the school had the white marble and the craze for it was all gone. You see, what happened here? People are influenced by the things around them and the behave in the like manner. This is nothing but behavioral economics which very well works for the stock market as well. Mga nangyare kina NOW, PXP, ISM, KPPI at AXELM.
A professor was taking a class when someone in the class yelled that there was a snake in the class. No one actually confirmed the news and everyone vacated the class. Later, it turned out to be a prank. This again is a classic case of behavioral economics where we follow what others are doing. Mga nangyare kina LOTO, MWC, etc.
How do we avoid this?
We can avoid this by having a trading strategy and sticking by our strategy. We can avoid this by having a trading plan and sticking by our trading plan. Most of all, we can avoid this by staying away from places kung saan malimit marami sources ng herd mentality or ng hype. The less you see hype posts or hype conversations the less you will be hyped.
Sa Trader’s Lounge walang hype kasi we delete hype posts. We warn members against doing it and in worse case we kick them out of the group. If you have a strategy and you trade using it. If ang outcome niya is a loss that is still better than joining the hype. A good strategy don’t always result to gains although mas marami gains mo kesa sa loss if you have a good strategy.
How do you know if may herd mentality ka? Simple. After you buy a stock you often feel the urge to go to facebook groups or other forms of social media where traders are gathered and look for opinions with regards to the stock you just bought. If the crowd says good things about your stock you will feel good. If the crowd says bad things about your stock, doubt and fear papasok sa mind mo.
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