Herd Mentality or hive mentality describes how humans pay too much attention to what others say or do, and they allow that collective behavior to influence their own thoughts and actions.
It’s basically jumping off a cliff because everyone else is doing it.
Rational thought goes out the window. Emotion and gut feelings take over.
As the herd grows larger and louder, some traders and investors are even more inclined to follow along, simply buying into the fact that “everybody else is doing it, so I should too.”
In financial markets, herd mentality is a common and real thing. The dot-com bubble is a prime example of investors going against the facts provided by a company’s financial statements, but still investing in their stock.
Psychologists believe that we’re hard-wired to follow the herd, because humans are emotional by nature, and it’s emotionally painful to go against a crowd believing or doing A, but we want to believe or do B.
“How could all of those people be wrong?” we ask ourselves.
Herd mentality is very much related to FOMO, where investors fear missing the next profitable chance to buy or sell a cryptocurrency as everybody is jumping into the game.
Because herd mentality has led to many traders and investors losing money because too many buyers drive up prices beyond an asset’s intrinsic value, ultimately resulting in prices going down as other traders sell, some traders actually take a contrarian approach to various trading strategies by purposefully going against the crowd.