The Dangers of Groupthink in Investing
Why it's important for investors to have conviction--especially when going against the crowd.
This is the fifth the Behavioral Finance and Macroeconomics series. We will explore the effect behavior has on markets and the economy as a whole--and how advisors who understand this relationship can work more effectively with their clients. (Access previous articles here.)
In the last article, we discussed the details of a bias called herding. Because of herding, investors can crowd into trades without careful consideration. Today we'll discuss a related psychological behavior known as groupthink. Groupthink isn't the same as herding. When herding, investors aren't doing much thinking--they are just acting by following the herd. Groupthink, meanwhile, has its own unique character.