Crowds

Alone, you can be reasonable. In a crowd, you do things you would never have done alone. And markets are crowds.

First engine: FOMO. Four letters for the fear of missing out.

Your neighbour made money with a crypto. Your colleague too. You have lost nothing. But it hurts like a loss.

So you buy. Not because the price is good, but because it is rising. And often late, when everyone is talking about it.

This engine runs in every bubble: people buy so as not to be the only one who did not.

Second: herd behaviour. Following because others follow.

It is not always stupid. If everyone is running, there may be a fire. Copying is often a good shortcut.

The problem is when everyone copies, and nobody is looking any more.

Professionals do not escape it. A manager who is wrong with everyone risks his job less than one who is wrong alone.

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Third: the information cascade. Each person ignores what they know, to follow what they see.

Two empty restaurants, side by side. The first customer picks A, at random. The second hesitates, sees someone in A, and goes in.

The third thought B was better. But two customers in A is a signal. He goes into A. And so on.

In the end, A is full, B is empty. And it all rests on the first customer's chance choice.

A cascade looks solid, since everyone agrees. It is fragile: a single piece of news can overturn it all.

Fourth: the self-fulfilling prophecy. The sociologist Robert Merton named it in nineteen forty-eight, with the example of a bank.

A bank is sound. A rumour says it will fail. Customers withdraw their money, to be safe.

But a bank keeps only a small part of deposits available. The rest is lent out. If everyone comes at once, it cannot pay.

The rumour was false. It becomes true. That is a bank run.

In September two thousand seven, in the United Kingdom, queues formed outside the branches of the bank Northern Rock.

In March two thousand twenty-three, Silicon Valley Bank received forty-two billion dollars of withdrawal requests in one day. The queue was on phones.

Deposit guarantees exist for this. If everyone knows their money is protected, nobody needs to run.

These mechanisms feed each other. Fear of missing out starts the race, copying speeds it up, the cascade makes it blind.

The remedy is not always doing the opposite of the crowd. It is often right. It is knowing why you act.

Before buying, one question: would I buy it if nobody were talking about it? If the answer is no, it is the crowd buying.