Herd Mentality

Herd mentality, or hive mentality, refers to the tendency of individuals to pay excessive attention to the actions and opinions of others, allowing this collective behavior to shape their own thoughts and decisions. It’s akin to leaping off a cliff simply because everyone else is doing it.

In such situations, rational thinking is often abandoned, giving way to emotions and instinctive reactions. As the group becomes larger and more vocal, some traders and investors feel an even stronger urge to conform, convinced that “everyone else is doing it, so I should too.”

In the realm of financial markets, herd mentality is a prevalent and tangible phenomenon. A notable example is the dot-com bubble, where investors disregarded the factual information presented in a company’s financial statements and continued to invest in its stock.

Psychologists suggest that humans are inherently predisposed to follow the crowd due to our emotional nature. It can be psychologically distressing to oppose a group that is collectively believing or acting in a certain way, even when one wishes to take a different stance. We often find ourselves questioning, “How could all of those people be wrong?”

Herd mentality is closely linked to FOMO (Fear of Missing Out), where investors are anxious about missing the next lucrative opportunity to buy or sell a cryptocurrency as everyone else jumps into the market.

Due to the fact that herd mentality has caused many traders and investors to incur losses—often because excessive buying inflates prices beyond an asset’s true value, leading to a subsequent decline as others sell—some traders intentionally adopt a contrarian approach. They choose to go against the crowd as part of their trading strategies.