Course 407: Psychology and Investing
Herding
In this course
1 Introduction
2 Overconfidence
3 Selective Memory
4 Self-Handicapping
5 Loss Aversion
6 Sunk Costs
7 Anchoring
8 Confirmation Bias
9 Mental Accounting
10 Framing Effect
11 Herding
12 The Bottom Line

There are thousands and thousands of stocks out there. Investors cannot know them all. In fact, it's a major endeavor to really know even a few of them. But people are bombarded with stock ideas from brokers, television, magazines, Web sites, and other places. Inevitably, some decide that the latest idea they've heard is a better idea than a stock they own (preferably one that's up, at least), and they make a trade.

Unfortunately, in many cases the stock has come to the public's attention because of its strong previous performance, not because of an improvement in the underlying business. Following a stock tip, under the assumption that others have more information, is a form of herding behavior.

This is not to say that investors should necessarily hold whatever investments they currently own. Some stocks should be sold, whether because the underlying businesses have declined or their stock prices simply exceed their intrinsic value. But it is clear that many individual (and institutional) investors hurt themselves by making too many buy and sell decisions for too many fallacious reasons. We can all be much better investors when we learn to select stocks carefully and for the right reasons, and then actively block out the noise. Any temporary comfort derived from investing with the crowd or following a market guru can lead to fading performance or inappropriate investments for your particular goals.

Next: The Bottom Line >>


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