Today, the instinct to listen to the group and follow the
crowd is often useful. For example, you may choose a restaurant based on
reviews , book a room at an inn after referencing feedback on TripAdvisor, or choose a plumber by
following recommendations from Facebook friends.
This instinct to favor what is popular and well-liked among
family, friends, and neighbors was crucial in the human race's early days. Common
group knowledge supported survival. For example, if everyone drank from a
certain body of water or ate a strange food and lived happily afterward, then
the water or food was deemed safe to consume. Following the crowd simplified
decision making, offering an easy and secure way to live.
Today, however, we may suffer harm when we apply such
thought processes to investing decisions. That is, favoring what is popular or
following the crowd may not be the best way to invest our money. Specifically,
we often wrongly chase performance, buying shares of stocks, mutual funds, or
other assets based on recent past performance and unloading them from our
portfolio when everyone else is selling.
We need to retrain our instincts not to ignore the crowd
altogether but to place a much greater weight to a disciplined investment
approach.
