Investing Psychology - Herd Mentality

I have listed "trading alone" as one of the rules to follow, and here's an excerpt from psychologist Irving Janis on "Groupthink".

Irving Janis describes groupthink as, "A mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members' strivings for unanimity override their motivation to realistically appraise alternative courses of action." Eight symptoms of groupthink include:

1. Illusion of invulnerability: Feeling that the group is above criticism.
   
2. Belief in inherent morality of group: Feeling that the group is inherently "right" and above any reproach by outsiders.
3. Collective rationalization: Refusing to accept contradictory data or to consider alternatives thoroughly.
4. Out-group stereotypes: Refusing to look realistically into other groups.
5. Self-censorship: Refusing to communicate personal concerns to the group as a whole.
6. Illusion of unanimity: Accepting consensus prematurely, without testing its completeness.
7. Direct pressure on dissenters: Refusing to tolerate a member who suggests the group may be wrong.
8. Self-appointed mind guards: Protecting the group from hearing disturbing ideas or viewpoints from outsiders.

This type of behavior is inherent not just in trading, but all aspects of life - workplace, gangs, religion, cults, drug addicts, political parties, the list goes on. It is human nature to be accepted into a group, to think and act as a group, regardless of whether or not if it's the most logical path.

In trading, a group will often feel attached to a particular view on the market or a particular stock that they feel is destined to go down or up. Generally when this is the case, this group of people will seek out bits and pieces of information / articles that only support their view, while ignoring articles and charts that state the contrary (rule 3). Even when the charts are clearly pointing down and outsiders/some group insiders are starting to think maybe we're trading in the wrong direction, the sheer power of herd mentality and groupthinking will override any opposing thoughts, no matter how correct it may be - even the contrarian thinkers will start to doubt their own beliefs. This is why people ride stocks from $100 all the way to bankruptcy. I have seen it time and time again, and it will continue to happen for as long the market trades.

The sooner one frees him/herself from a group, the sooner he or she will start making winning trades. Trade alone and you will prosper.