What are herding and FOMO?
The word herding comes from animals in a herd: when one cow runs in a direction, the rest run too, without knowing why. In investing, herding means buying because many people are buying and selling because many are selling, without checking any reason for yourself.
FOMO stands for “fear of missing out”. When friends, relatives or colleagues talk about their profits, it feels like “I’m the only one left behind”. That feeling often pulls people into a market just when prices have already risen a lot.
Say everyone at Tanvir’s office talks at lunch about a new online “investment”. One says they made a good profit last month, another shows a screenshot. Tanvir doesn’t know who runs it or whether it is licensed. But everyone is in, so he puts money in too. The real reason for his decision is not information but the crowd. The story is made up.
Why it matters to an investor
- Getting in late: by the time a crowd is visible, prices have usually risen a lot, so following it often means buying high.
- Everyone rushing out at once: when the crowd starts to leave, everyone wants to sell together, prices drop fast and buyers are hard to find.
- An easy route for fraud: many schemes deliberately create a sense that “everyone is making money”, so newcomers join without checking.
- Forgetting your own goals: comparing yourself with other people’s profits pushes your own timeline, needs and capacity for risk out of mind.
Why people follow the crowd
In 1951 the American psychologist Solomon Asch ran an experiment. Sitting in a group, people had to answer a simple question: which line is the same length as another. The rest of the group were secretly told to give the wrong answer. Alone, people made mistakes less than 1% of the time, but under group pressure about 32% of answers went along with the group’s wrong answer. About 75% of people went along with the group at least once.
In other words, even when the answer is plain to see, going against the crowd feels hard. In investing the answer is never that clear, so the pull of the crowd is even stronger. People also often think, “so many are buying, they must know something”, when perhaps everyone is just buying because they see each other buying.
In Bangladesh: the 2010 share market
According to a report in The Daily Star, the number of BO accounts in the share market rose in 2010 from about 1.25 million a year earlier to about 3.21 million in December, an increase of about 154%. Prices had risen almost every month from August 2009 to November 2010. The report said many traded on the word of brokers or acquaintances, and on rumours, without checking the companies, and some did so with borrowed money.
From December 2010 the market began to fall fast, and many new investors suffered heavy losses. The fall is covered in more detail in the lesson on bubbles and crashes.
FOMO in the age of social media
- On Facebook, YouTube or Telegram people post screenshots of profits, not losses. So it looks as if everyone is winning.
- Phrases like “last chance today” or “limited places” are used deliberately to trigger FOMO.
- Some groups push up the price of a share or coin together, draw others in, then sell and leave. This is called a pump and dump.
- One small question helps: “Would I buy this if nobody had said anything?”
Common mistakes
- Not checking for yourself because “so many people are in, it must be fine”.
- Making quick decisions after seeing other people’s profit screenshots.
- Putting in your emergency fund or borrowed money out of FOMO.
- Panicking and getting out at any price when the crowd starts to leave, following the crowd again.
A crowd is not information. Many people buying only means that many people are buying; the answer to why you are buying has to be your own.