In the majority of investments made by people, herd mentality is a very common investment psychology. Here, most past investments have been completed by the masses, forming comprehensive data to demonstrate inferences.

The instinct of an investor is closely related to the masses, which means that he/she seems to have no rational view of a certain investment, but is more likely to deviate from the flow of the majority of the masses - this small phenomenon is called "minority." "Herd mentality."

The term originates from the natural instinct of many sheep to walk in groups to avoid falling into dangerous traps.

If you look around, our daily behaviors are based on this psychological term we just read. We will find that the concept is more related to "how natural instincts work in humans."

Interestingly, you can also find a large number of investment communities following various herd mentalities to make various financial decisions, such as buying new properties or investing in the stock market. After seeing others make profits from investments, our brains tell us not to think about it anymore.

Why does herd behavior occur?

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Although collective investment is harmful and unreasonable, most people choose this trend for two basic (human) reasons:

Strong social pressure: Most people like to be accepted by a group rather than being labeled as an outsider or an outcast. Following what others are doing is a natural way to become a member of that group. This is why following the crowd is a logical trend to avoid social pressure.

Irrational belief that many people cannot be wrong: Overall, people believe that the larger the group involved in any decision, the smaller the chance that the decision-maker will make a mistake. Similarly, this is a natural human instinct. Unless someone lacks experience and expertise in the field, he/she should avoid directly confronting the masses.

Herd mentality in the stock market:The most severe financial crises in the stock market, such as the .com bubble or the 2008 economic recession, can be attributed to the same human tendency—herd mentality. Here are some examples of herd behavior in the stock market under normal market conditions:

Buying the stocks that everyone else is buying

The purchasing decisions of average investors are easily influenced by the actions of their friends, neighbors, or acquaintances. Suppose all your friends have bought a particular stock that is rising in price day by day. Moreover, all your friends are teasing you for not buying that stock when you initially suggested it. What is the natural instinct for the average investor in this situation?

If everyone around you is investing in a particular stock, the trend for potential investors is to do the same. However, this strategy will never yield fruitful results for investors in the long run.

Investing in "hot" stocks

Hot stocks are the darlings of new investors because they constantly make the news, and everyone is talking about their potential for appreciation. However, a stock only becomes a "hot" stock after a majority of investors, or the herd, shifts their funds to it, having seen many other investors do the same.

The ones who truly benefit from these stocks are those who invested in them before they became hot. The others (followers) who put money into these stocks (when the prices are already high) will lose their hard-earned money in the stock market.

How to avoid herd mentality and make better investment decisions?

It is clear by now that there is no benefit in judging the "collective" behavior when making important decisions about investments. Naturally, following the choices of the majority is always an enticing and "safe" option. However, without the foresight to understand the context, it is impossible to make any significant decisions.

The stock market is risky, and investment should be approached with caution.Please provide the text you would like translated into English.