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How herd mentality affects more than just your investments

From blind loyalty to large-scale organisations, to endlessly trying to keep up with influencers, we explore how sheep-like behaviour can damage your wealth plans beyond investments alone. Simon Prescott explains.
Published 3 May
4¾ mins

As our understanding of the behavioural biases we are inadvertently subject to has grown, so too has our appreciation of just how invasive these bad cognitive patterns are. Whether it is due to too much information, not enough meaning, the need to act fast, or the struggle about what we should remember, it is estimated that there are over 180 such biases. Each spells out a common failing of how humans think and, as a result, helps us understand where we might begin to ‘improve’.

And while we have talked about some key biases in previous articles – such as the Breaking the biases around investing for women article published in March – it is worth flagging just how insidious these can become for your finances using the predisposition of herd mentality as an example.

This bias highlights how people unconsciously act according to what others are doing, rather than thinking rationally for themselves. Mass demonstrations, riot mobs, general strikes, the tribal behaviour of sports fans and acts by religious groups all provide excellent examples of a crowd acting as one.

But this approach to thinking can also be about very ordinary everyday decisions, judgements and opinions. Take the frenzy of toilet paper buying that took place at the start of the pandemic as another example of herd mentality. Once people realised others were stockpiling, they followed suit. Without questioning why or stopping to think about the consequences, there was a global shortage. There’s even a board game about herd mentality you can play!

There are numerous historical instances too. The desire to live during the Salem Witch Trials led people to become active accusers and ‘rid society of witches’. Between 1692 and 1693, more than 200 people were accused and 26 died. During the French Revolution (1787-1799), the mass fear of the guillotine was used to purge France of people who were viewed as a threat to national security during the Reign of Terror. An estimated 17,000 people were beheaded and up to 40,000 killed in total.

These events prompted the scientific thinking. In 1872, the British journalist, businessman and essayist Walter Bagehot – whose position as editor of The Economist from 1861-77 is still honoured in the publication’s weekly commentary on UK current affairs – wrote Physics and Politics. French sociologist and criminologist Gabriel Tarde followed as he articulated the concept of the group mind in 1892 and Gustave Le Bon, a leading French polymath, then built on the collective work with what is considered to be one of the seminal works on crowd psychology in 1895.

In 1936, the British economist John Maynard Keynes coined the phrase ‘animal spirits’, where the spiritus animalis (the breath that awakens the human mind) affects emotions of confidence, hope, fear and pessimism, and, ultimately, financial decision making. Animal spirits, according to Keynes, help explain why people behave irrationally, particularly during economic crises, and account for the role of herd mentality when it comes to investing. When this happens, analytical and technical skills take a back seat. Decisions are governed by animal-like reactions.

And while the example of the dot-com bubble is (perhaps) the most famous example of herd behaviour in the investment world and the damage it caused is well documented, there are pitfalls if you succumb to this way of thinking with regard to wider finances too.

1. Keeping up with the Joneses

According to a Financial Times article, global economic and social changes of the past 15 years – such as rising school fees and house prices – have resulted in those at the bottom of the top income bracket “feeling the tides of income inequality lapping around their ankles”. Named the squeezed one-percenters, their “feelings of relative disadvantage” and undaunted social aspirations can result in money worries. This perfectly underpins the dangers to anyone of trying to follow the herd in order to keep pace, no matter what their wealth or status is.

2. Big brand affiliation

This is another example of herd mentality leading people down a path that might not be the right one for them. For example, 59% of iPhone users admit “blind loyalty” towards Apple.

Many people report feeling ‘safer’ when opting to work with or be supported by large-scale organisations, but digging a little deeper may unearth some faults in this narrative. For example, a bigger bank means more clients, potentially meaning a less personal approach. As a result, a smaller firm may not only have to work harder to ensure contented clients, but also offer more intangible benefits in order to differentiate themselves from the competition who can leverage a logo.

3. Pursuing someone else’s wealth plan

Following the crowd can also mean trying to apply someone else’s wealth plan to yourself. While on paper, you may enjoy a very similar lifestyle to the person in question, there could be a great deal going on beneath the surface that differentiates you. For example, while you might have a similar role at a comparable company to a friend, your pension plans could be poles apart, which would mean you need to plan for retirement very differently. You might live in houses with the same sale value, but your neighbour might have high-performing investments that you don’t know about.

Instead, we believe you should think of herd mentality as peer pressure, which we are taught to rebuff from a young age. This same way of thinking should apply to financial decision making – recognising that the concept of the ‘wisdom of the crowd’ is, at best, flawed. Instead, in order to reach your full financial potential, set up a discussion with a wealth planner of your choice who can help you design and determine a plan that is based on you and your family’s specific needs and circumstances.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how wealth planning can help them achieve their financial goals and objectives, or call +44 (0)1624 645000 to speak to our client services team.

 

If you would like to find out more about how we can help you with wealth planning support, please contact us on the same number as above, or complete the contact us form using the link below.

Any examples of investments and structures used are for illustrative purposes only. The inclusion does not constitute an invitation or inducement to buy any financial investment or service. None of the content constitutes advice or a personal recommendation. Nedbank Private Wealth does not provide individual tax advice, and instead works with clients’ existing advisers or can provide an introduction if needed. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.

about the authors

Simon Prescott

Simon Prescott

Simon’s role is to work with our UK and international clients, and their families, to help them structure their investments and other financial assets to achieve their goals and aspirations, through the development of bespoke wealth plans. The planning process starts with an assessment of clients’ current finances, before developing individual scenarios using cashflow modelling. The plans are then regularly reviewed in the context of clients’ changing lives to ensure they remain on track to see their plans come to fruition.

 

His appointment followed the establishment of bank’s wealth planning function, where he was instrumental in its design, build and implementation. Simon has over 20 years’ experience of delivering investment and planning advice. He has worked for Nedbank Private Wealth since 2007, when he started with the firm as a private banker.

 

Simon holds the Level 7 Diploma in Advanced Financial Planning, the highest financial planning qualification in the UK, and is a Certified Financial PlannerTM, a Chartered Wealth Manager and a Chartered Fellow of the Chartered Institute for Securities & Investment.

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