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.