Herd instinct explains why people tend to imitate others. (source: Investopedia)
Traders’ characteristics are painted with fear and greed. That is what pushes the market up and down beyond rational manners.
Now when I talk about fear, I am referring about the fear to miss out. Some traders believe that when the market is moving higher or lower, some other people who may be aware of some new information have acted and the rest of the mob needs to follow suit.
It is the impulse that pushes people to move in or out of a trade without complete knowledge of any new and reliable information.
Research has found that traders usually act on very limited amount of information. Reading one article in a newspaper may lead them to believe that the source is reliable and worthy of acting upon it.
Once traders have built an opinion on a particular trade, they are usually hard to change their mind and begin to propagate their belief to others. That is when the herd mentality comes into bear.
Question: would a wiser investor be in a position to make additional profit at the expense of traders who belong to the “herd mentality”?