Personal development

In the previous post, we saw how easily we are influenced by the opinions of others. In trading, the crowd is everywhere: forums, chat groups, social media, and the friend who “knows” exactly where the market is going.

Belonging to a group is comfortable. When everyone shares your view, you feel less responsible for the outcome, and if the trade goes wrong, at least you were wrong together with others. This is exactly what makes herd behaviour so dangerous: it feels safe, even when it is not.

The problem is that, inside a herd, nobody checks whether the idea is right. A group tends to settle on a shared view that is rarely stated openly. Nobody objects, so the view is treated as accepted, and each person’s behaviour reinforces the others’. Optimism grows in a rally, panic grows in a sell-off, and almost nobody stops to ask whether it makes sense.

The Stanford Prison Experiment

A famous example of how a group context can change behaviour is the Stanford prison experiment. In 1971, the psychologist Philip Zimbardo and his colleagues set up a mock prison at Stanford University in California. The participants were student volunteers, randomly assigned to the role of guards or prisoners.

The experiment was planned to last two weeks, but it was stopped after six days, because the guards had started to behave in an abusive way towards the prisoners. Zimbardo concluded that a role and a group context can push ordinary people to act in ways they would never choose on their own.

In recent years, however, the study has been criticised, in particular because the guards’ behaviour was not as spontaneous as it was first presented. For this reason, it is better to treat it as an illustration of the effect of the group, rather than as proof. Asch’s experiment, described in the previous post, is a more solid example.

What This Means for Your Trading

The market is a group too. When prices crash and everyone sells, or when a market keeps rising and everyone buys, acting differently feels risky, because you are alone. But doing what the crowd does is not a strategy.

Staying out of the herd does not mean being contrarian for the sake of it. It means having your own trading plan and your own rules, and deciding before you open a trade, not while the crowd is shouting. Every trade should be checked against your plan, not against what others are saying.

If you notice that your only reason for a trade is “everybody is doing it” or “everybody says so,” stop and go back to your own analysis. If the analysis does not support the trade, you have your answer.

Stepping away from the herd will cost you some comfort, but you will gain something more valuable: the ability to take full responsibility for your decisions, and to learn from them.