Herd behaviour: Are you just following in others' money footsteps?
Updated: Jul 14, 2021
Here's the thing, money is not as complicated as it's been made to seem. Yet, it is much more multidimensional than we've been led to believe.
And I don't mean that in a hippie sort of way. I mean that up until recently, finances have been approached from mostly a narrowly stark numbers-only perspective.
But human beings are not computers. We are indeed complex and multi-dimensional in our thinking, and so does our money management have to be.
Being good with money means in part recognizing the inter-play between different decision making systems like emotions, beliefs, thoughts and external influences. That can mean diving into subjects like sociology, economic psychology, evolutionary biology and neuroeconomics. Yep, that's a thing.
Now, you don't have to do that. We've done the heavy lifting for you!
First stop is evolutionary biology. That quickly takes into something we see play out time and time again when it comes to money: herd behaviour.
In the end, it seems mom was right when said, “Be careful who you surround yourself with.”
Keeping up with the Joneses, the Kardashians, etc. is another great example of herd behaviour. If you ain't got it, don't spend it! Sounds simple, right? But in real life, it's not always that straightforward...
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Herd Mentality Explained
Herd mentality aka mob mentality aka herd behaviour aka crowd mentality, and many more... simply means following others' in trends rather than relying on our own discernment and analysis to make decisions.
It's FOMO in its oldest form and it's actually natural to human beings, we learned a lot by following others. It's also a desire to belong, can't fault us for that one.
Here are some examples of herd behaviour
Let's say you're walking down the street, looking for a restaurant to have dinner at. You're in the mood for Italian and lucky for you, there are 2 places right around the corner.
Which one do you choose? The one that's bustling, crowded with people, or the restaurant with a lot of open tables?
Most people would choose the busy place, believing that it's crowded because the food is better, they are socially validating their decision.
While picking a restaurant may not be such a big decision, your personal finances are. Herd behaviour in money can cause historic events like asset bubbles or market crashes.
Like the tulip story
Tulipomania occurred in 1636, thanks to herd mentality, a tulip bulb cost as much as a nice house in Holland. It was a brand new market for a luxury good, and while new research claims it didn't quite crash the Dutch economy as the satirical accounts say, it still shows the power of following the herd.
If you really want to get fancy and thrown some finance-y terms at your next dinner part, you can call it irrational exuberance.
That's when investors become so phenomenally enthusiastic with an asset, they keep on buying and prices rise beyond what that assets fundamentals' justify. And it usually/eventually crashes.
If you profit from it, it's not such a big deal, right?
But what if you don't?
Herd mentality really means you follow the crowd because you think they are better informed. In our modern world, that's what happens we are financially illiterate.
Not only do we avoid taking the smart steps to building wealth, but when we do, we may just rush into buying a home, because "that's what everyone is doing", right? Even if that's not necessarily the best financial move for you...
So, if being financially successful is not about FOMOing into buying Bitcoin, how can you become aware of herd mentality in your wealth creation path and ensure that you are taking the best financial steps for you?
Instead of following the crowd, what you should do instead is to build your own financial knowledge foundation.
According to recent studies, the reality is that
30% of adults could answer at least four of five financial literacy questions on fundamental concepts such as mortgages, interest rates, inflation and risk.
Yet those are all parts of our daily lives.
About 40% of Americans turn to family, friends, or coworkers when they have a question about finances
Instead of an expert.
Just thinking about their finances make over 50% of people feel anxious.
I know I did for a long time....
It's no wonder so many people suffer financially.
Becoming financially smart changes the game
It empowers you to create the level of wealth you desire
It helps you understand the true value of money
It helps you get out of debt and prevent it from happening again
It leads to better investing
It gives you independence
Sounds pretty awesome, right?
How does one become financially smart and literate?
Financial literacy is making the best financial decisions every day for a lifetime of financial wellbeing and it involves knowing how to earn the most you can, spend consciously, borrow wisely, save and invest abundantly and protect actively.
If you're new to this, we want to show exactly how to create wealth.
You're already ahead of the game by reading this article! Let's keep the momentum going!
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