“If Johnny jumped off a bridge would you jump too?”, said every mother ever. Just shows how pervasive the herding or follow the crowd instinct is. Like bison on the prairie we seem to move as a herd. While there is safety in numbers, sometimes the herd mentality is detrimental to us and our finances.
Native Americans took advantage of the herd mentality by starting a stampede among the herd of bison and driving them off a cliff as the herd panicked. So it goes with stock market investors sometimes. We all get spooked and run for the exit at the same time and some of us invariably end up at the bottom of a precipice.
Or, just as dangerously, we all sense the opportunity to make a fortune and pile into the same stocks at the same time until, the last fool climbs on board. Then when there are no more fools to jump into the boat it sinks from the weight of the herd.
Cognitive biases are mental shortcuts that helped our ancestors survive in a hostile environment. In the modern world these deeply ingrained shortcuts can be dangerous to our financial wellbeing. Although it is impossible to purge your psyche of these biases, if you are aware they exist you have a better chance of overcoming the urges they bring and making more rational and profitable decisions.