Wednesday, 23 January 2008

Herd Mentality at the speed of light ?

Yesterday's and today's roller-coaster on international stock exchanges are great examples of herd mentality that works against most peoples interests.

The average private investor buys when prices are already high and rising (near the top of the cycle) and sells when prices are low and dropping rapidly (near the bottom of the cycle). Exactly the opposite of tactics that would be more likely to make money (buy low and sell high).

This happens because we are social animals and often feel obliged to follow the herd, regardless of whether or not there is much logic in what it is doing. The herd in this case is driven by sentiment and confidence, rather than anything very rational. Add in a bit of supply and demand economics and automatic trading by computer systems at the speed of light and hew presto we've created a monster robotic wild animal that is leading the herd, sometimes straight over a cliff.

So how can you use this to your advantage ? Easy - just get your happy customers to do it for you by asking them for testimonials and making them highly visible to the rest of the 'herd'. Even better, look for the movers and shakers, the leaders of the herd and if like what you sell, the rest should follow.

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How much should you charge ?

Recent research has shown that, in some situations, people actually like to pay more !
The study was based on peoples preferences for the taste of different wines. Using a technique which lets us see which parts of the brain are most active at any time it was found that the 'pleasure centre' in the brain was more active when people where drinking more expensive wine.

Not surprising you might say, as more expensive wine usually tastes better ?

The twist in the tail (or should that be the twist in the corkscrew ?) was that the wines apparent prices had all been mixed up randomly, so there wasn't any real connection between displayed price and quality of the wine.

So when you are next setting some prices, bear in mind that your customers might well be happier if you charge them more !

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