BlogMass Psychology & Financial Success: An Overlooked Connection
Mass Psychology & Financial Success: An Overlooked Connection
An Introduction to Mass Psychology: Understanding Group Behavior?
Updated April 29, 2023
Mass psychology is a branch of social psychology that focuses on the study of group behaviour and the emotions, beliefs, and attitudes that drive the behaviour of large groups of individuals. It aims to understand why people behave the way they do in a group setting and how the opinions, beliefs, and emotions of others influence this behaviour. Mass psychology is relevant in many fields, including marketing, politics, and finance, as it helps explain why people make certain decisions, why trends emerge, and why certain events occur. It is an essential tool for anyone looking to understand large groups’ behaviour and make informed decisions, whether in business, investing, or everyday life.
Defining Mass Psychology from a Contrarian Perspective:
Defying the Crowd: Exploring the Underbelly of Mass Psychology! This thought-provoking study goes against conventional wisdom, delving into the darker side of group behaviour and decision-making. From exploring why people follow the masses blindly to the dangers of conformist thinking, it uncovers the driving forces behind herd mentality, revealing how to use this knowledge to your advantage and make bold, contrarian moves in the face of popular opinion—a must-read for anyone seeking a contrarian edge in life and business.
Mass Psychology: A Contrarian View
To be wise is to be open, to be open is to be knowledgeable; to be knowledgeable is to understand that you really know nothing. Sol Palha
Mass psychology, the emotional and behavioural influence of a group of individuals on one another, is a timeless phenomenon that has only recently come to light. From flocks of birds to shoals of fish, it’s evident in nature that creatures tend to follow a leader. Yet, contrary to popular belief, evidence suggests that humans are not always rational in their decision-making, as emotions, biases, and cultural influences often override rational thought. This leads to the formation of herding behaviour, which has far-reaching implications in fields such as investing. For the contrarian investor, understanding the principles of mass psychology and how to think independently from the crowd is essential in making well-informed decisions. For a more comprehensive look at the subject, consider reading the entire How to Use Mob Psychology to invest in the Markets
Mass Psychology and Market Success: Staying Ahead of the Crowd
Mass psychology may have its roots in the emotional and behavioural influence of the herd, but the savvy contrarian investor knows better. The masses may follow the crowd like a flock of sheep, but success in investing lies in marching to the beat of your own drum. So, when the Market is awash with pessimism, and the streets resemble a scene from a horror movie, it’s time to buy low with a smile and a twinkle in your eye. And when the masses are so excited that they’re doing the investing equivalent of a conga line, it’s time to sell high, tip your hat, and bid them farewell. Remember, the only thing more beautiful than making a profit is making it while thumbing your nose at conventional wisdom.
The astute investor purchases when the crowd panics and sells when the mob jumps up with joy.
The Mass Mindset: Key Concepts and Applications in Mass Psychology
Going against the grain has never been more crucial in investing. Research and data-driven analysis reveal the significance of mass psychology in the realm of investing. The masses may follow each other like lemmings, but astute contrarian investors know that true financial success lies in taking a different approach. By studying and understanding the masses’ behavioural patterns and emotional drivers, they can identify when to make a bold, counterintuitive move informed by research and data.
The dot.com boom of the late 1990s is a case study of the dangers of blindly following the herd without proper analysis. True leaders in the stock market are not afraid to chart their course, swim against the tide, and leverage research and analysis to inform their decisions. So, be an astute investor, embrace your inner contrarian, and lead the pack to financial success by relying on research and data-driven analysis. So, be a contrarian, blaze your own trail, and reap the rewards of thinking outside the box.
The Role of Mass Psychology in Making Sound Investment Decisions
Contrarian investing is about swimming against the tide and bucking the trend of conventional wisdom. The astute and contrarian investor had the foresight to see the limitless potential of the Internet, despite the scepticism and lack of interest from the masses. By recognizing the paradigm-shifting potential of this new technology and the dynamics of mass psychology, they were able to make bold and strategic investments.
The result? They reaped the rewards of their informed and counterintuitive approach, swimming against the tide and beating the market. The Internet revolution showed that the key to financial success in investing combines research, analysis, and a willingness to challenge conventional wisdom and take a contrarian stance. In adopting this stance, these investors beat the market, rewrote the rules of investing, and proved that being a contrarian can lead to immense financial success.
The Crowd Mentality: Why Group Thinking Can Be Dangerous
The masses’ negative perception of a particular sector provides a prime opportunity for the astute and contrarian investor to act. Such was the case with the Internet sector in the 1990s. The foresighted investor opened positions in this sector while the masses were still sceptical and took a wait-and-see approach. When the masses finally jumped on the bandwagon in mid to late 1998, the astute investor had already established a strong position. The subsequent market frenzy and eventual sector implosion serve as a reminder that following the crowd and herd mentality can lead to devastating losses. In contrast, a contrarian approach can lead to substantial rewards. The Internet sector provides a vivid example of the power of a contrarian and informed investment strategy.”
Navigating Groupthink: The Role of Mass Psychology in Investment Decision
The leaders were alarmed at this behaviour, as they should have been, since this frenzy was unsustainable. History indicates that the masses have never been on the right side of the markets going back to the Tulip Mania. One can see how the big players employ mass Psychology to fleece the masses; the topic is dealt with very succinctly in this article; Psychological & Economic Deception Wall Street’s Weapon of Choice.
Back to the dot.com bubble, knowing the end was near, they started to sell towards the end of 1999 and move their assets into cash and bonds while the feeding frenzy continued. In March 2000, the markets began to correct, and by the end of the year, the primary uptrend line was violated, and the market was ready to crash. By 2002, the market had lost more than 70% of its value, and many of the masses who had momentarily tasted wealth moved to a state of poverty that they could not have envisioned a few months back.
Exploring the Essential Principles of Mass Formation Psychology
The leaders represent less than 2% of the population yet take in more than 90% of the profits.
When something is popular, the end is very near. One needs to do the opposite of what one’s emotions dictate regarding the markets.
When an investment is viewed with disdain or frowned upon, the time to open a position is close.
You have to learn how to fight the fear of selling out too fast after taking a position; remember, it won’t just go up. It could likely go down a bit more or move sideways for months or even a year. The one area you can draw comfort from is this, the longer the sideways action, the stronger the upward move will be when it finally transpires.
Other factors to consider in Mass Psychology
Keep extra money on hand so that you can open additional positions at better if the opportunity arises.
In all likelihood, you will have a 50-100% retrenchment in the first stage of the bull market, meaning that your shares could double and then shed a significant portion of the gains. This is known as the shakeout phase, whereby the weak hands are forced out of their positions and end up selling at or very close to the bottom. Holding on to the position usually leads to huge rewards.
When the investment becomes popular with the masses, pay close attention to market sentiment. Perform simple trend line analysis on all your holdings. Once the primary uptrend shows signs of wear, start banking your profits and tighten your stops.
Wait patiently for the next opportunity to show up; there is always another chance.
Improve Risk to Reward Ratio: Combine Mass Psychology with Technical Analysis
Mass psychology is not a complex field; it is effortless to understand; all one needs is a bit of common sense.
Once you understand the basics, it becomes easy to see why the masses are on the wrong side of the market. When one combines Crowd Psychology with Technical Analysis, the risk-to-reward ratio improves significantly. This combination allows one to consistently be on the right side of the market.
The Big Picture: Important Considerations for Understanding Mass Psychology
Mass Psychology comes to identifying the emotion that is driving the markets. Once you identify the emotion, it is straightforward to spot a new trend. Now that you know the basics of Mass psychology, you might also find the contrarian investing topic to be of interest. One key factor that is important to all stock market traders and investors is portfolio management.
The Trend is your friend.
There is no tool more potent than Crowd Psychology. The crowd drives the market, and the driving force behind the masses is emotions. Therefore you must understand what emotions are driving the groups at any given moment. Understand the sentiment, and you know the market. Only then should one look into trying to master technical analysis. Fundamental analysis is fundamentally flawed as the data is provided in a standard format. This means anyone looking at the data will arrive at the same conclusion.
In an extensive reading of recent books by psychologists, psychoanalysts, psychiatrists, and inspirational lists, I have discovered that they all suffer from one or more of these expression complexes: italicizing, capitalizing, exclamation-pointing, multiple-interrogating, and itemising. These are all forms of what the psychos themselves would call, if they faced their condition frankly, Rhetorical-Over-Compensation. James Thurber 1894-1961
Understanding psychology is critical to becoming a better investor. If you understand the emotion driving the market, you will be light years ahead of the competition.
Random Musings On Crowds
The masses are unaware that everything is manipulated, from the food you eat to the information you are provided. Hence they cannot come up with a plan. 80% of the work involved in finding a workable solution is correctly identifying the problem. The mass media and the top players understand that if they alter your perception, they can control your actions. In other words, if the angle of observance is altered so is your perception. If you understand this simple principle, then you will be in control of your perceptions.
Most experts focus on the tree or the forest; in both instances, they fail to see the big picture. This is why most experts are on par with rubbish- a smelly substance that has a strong effect but produces nothing of value. We firmly suggest that you read or view Plato’s allegory of the cave. It will open your eyes to the basic concepts of Mass Psychology and why so-called experts are almost always wrong.
Knowledgeable Experts on the subject of Mass Psychology
“It is crowds rather than isolated individuals that may be induced to run the risk of death to secure the triumph of a creed or an idea, that may be fired with enthusiasm for glory and honour… Such heroism is without doubt somewhat unconscious, but it is of such heroism that history is made.”
“He is no longer himself, but has become an automaton who has ceased to be guided by his will.”
“In a crowd every sentiment and act is contagious, and contagious to such a degree that an individual readily sacrifices his personal interest to the collective interest.”
“Ideas being only accessible to crowds after having assumed a very simple shape must often undergo the most thoroughgoing transformations to become popular. It is especially when we are dealing with somewhat lofty philosophical or scientific ideas that we see how far-reaching are the modifications they require in order to lower them to the level of the intelligence of crowds…. However great or true an idea may have been to begin with, it is deprived of almost all that which constituted its elevation and its greatness by the mere fact that it has come within the intellectual range of crowds and exerts an influence upon them.”
“The majority of men, especially among the masses, do not possess clear and reasoned ideas on any subject whatever outside their own specialty. The leader serves them as guide.”
“How numerous are the crowds that have heroically faced death for beliefs, ideas, and phrases that they scarcely understood!”
“Were it possible to induce the masses to adopt atheism, disbelief would exhibit all the intolerant ardour of a religious sentiment, and in its exterior forms would soon become a cult.
“In crowds the foolish, ignorant, and envious persons are freed from the sense of their insignificance and powerlessness, and are possessed instead by the notion of brutal and temporary but immense strength.
Mr Montaigne was a very wise man and the quotes listed below provide a window into the inner workings of the mass mindset and can be used to improve one’s understanding of Mass Psychology
Ignorance is the softest pillow on which a man can rest his head.
Rejoice in the things that are present; all else is beyond thee. Michel de Montaigne
A wise man never loses anything, if he has himself. Michel de Montaigne
The most certain sign of wisdom is cheerfulness. Michel de Montaigne
In true education, anything that comes to our hand is as good as a book: the prank of a page- boy, the blunder of a servant, a bit of table talk – they are all part of the curriculum. Michel de Montaigne
Age imprints more wrinkles in the mind than it does on the face. Michel de Montaigne
Carl Jung on Crowds
“…if people crowd together and form a mob, then the dynamisms of the collective man are let loose – beasts or demons that lie dormant in every person until he is part of a mob. Man in the mass sinks unconsciously to an inferior moral and intellectual level, to that level which is always there, below the threshold of consciousness, ready to break forth as soon as it is activated by the formation of a mass.”
“The bigger the crowd, the more negligible the individual.”
“A group experience takes place on a lower level of consciousness than the experience of an individual. This is due to the fact that, when many people gather together to share one common emotion, the total psyche emerging from the group is below the level of the individual psyche. If it is a very large group, the collective psyche will be more like the psyche of an animal, which is the reason why the ethical attitude of large organizations is always doubtful. The psychology of a large crowd inevitably sinks to the level of mob psychology. If, therefore, I have a so-called collective experience as a member of a group, it takes place on a lower level of consciousness than if I had the experience by myself alone.”
Conclusion
In conclusion, mass psychology is a branch of social psychology that studies the behaviour of large groups of individuals and aims to understand why people behave the way they do in a group setting and how the opinions, beliefs, and emotions of others influence this behaviour. It is a crucial tool for anyone looking to understand the behaviour of large groups and make informed decisions, whether in business, investing, or everyday life. The contrarian approach to mass psychology is all about challenging conventional wisdom and making bold moves in the face of popular opinion.
By understanding the principles of mass psychology, investors can identify when to make counterintuitive moves informed by research and data. The Internet revolution of the late 1990s exemplifies how the astute and contrarian investor can achieve financial success by challenging conventional wisdom and swimming against the tide. In the realm of investing, understanding the principles of mass psychology is essential to make well-informed decisions.
FAQ’s
Question
Answer
What is mass psychology?
The study of significant group behaviour and the emotions, beliefs, and attitudes that drive it.
Why is mass psychology relevant?
It helps explain why people make certain decisions and why trends emerge in many fields, such as marketing, politics, and finance.
What is the importance of contrarian thinking?
It allows individuals to make independent, well-informed decisions and challenge conventional wisdom.
What is the role of research in mass psychology?
It is essential for identifying behavioural patterns and emotional drivers that influence group behaviour and making informed decisions.
How can mass psychology be applied in investing?
By understanding large groups’ behavioural patterns and emotional drivers, investors can make well-informed, counterintuitive decisions.
What can we learn from the dot-com boom and bust?
Blindly following the crowd without proper analysis can be hazardous, while recognizing the paradigm-shifting potential of new technology and mass psychology dynamics can lead to immense financial success.
How can we avoid the pitfalls of group thinking?
Challenging conventional wisdom and thinking independently from the crowd while studying the behavioural patterns and emotional drivers that influence group behaviour.
References
Sir John Templeton’s Template for success: Templeton.org
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Thanks for the great blog post!
I’ve actually created a similar article about ‘7 Trading Psychology Ideas from Dr. Brett Steenbarger.
I think you’ll love it and it’d be beneficial to your followers, as well.
Here’s the link if you’d like to take a look:
http://www.intelligenttrendfollower.com/trading-psychology-brett-steenbarger/
Jay