Atlas of Cognitive Biases #31 · Information and beliefs. The crowd doesn't know more than you
What it looks like in trading
entering because “everyone in the chat is buying”
chasing a move that's already underway (FOMO)
a market that's trendy on social media
An example from a session
Everyone in the live chat is writing “long”. The trader goes in, even though price is far from the level in their plan. The trading room is a place to exchange ideas, not to vote on positions.
What the research says
Bikhchandani, Hirshleifer and Welch (1992) described information cascades: each new person ignores their own information and imitates those before them, so a whole group can be wrong in unison on the basis of the first few people's decisions. Abhijit Banerjee (1992) described a similar model.
Following what others do instead of your own analysis. The more people do something, the more right it seems. Also known as the bandwagon effect.
How does herd behaviour show up in trading?
Typical signs: entering because “everyone in the chat is buying”; chasing a move that's already underway (FOMO); a market that's trendy on social media.
Educational content, not psychological advice or an investment recommendation.