Cracking the Pack Mentality: Group Dynamics in Financial Markets

by Sol Palha, Lead analyst at Tactical Investor

Harnessing Pack Mentality for Success in Investing

Updated March 31, 2023

The time for change is today for tomorrow never ever comes; change now or remain woven in yesterday’s cocoon forever. Sol Palha

Overview from Part 1

In this post, I delve into the topic of how emotions can easily sway the masses and how they can result in poor decisions and market behaviour. The masses tend to act in unison, disregarding individual thought or reason. This herd mentality can lead to market bubbles and crashes, devastating groups and the economy.

Understanding mass psychology and the dangers of blindly following the crowd is essential. Instead, we should always look to historical events and past market behaviour as a guide and never make decisions based on emotions or what others are doing.

By becoming aware of mass psychology and its influences on the markets, we can make informed decisions and potentially avoid costly mistakes. The wisdom and insights shared in this book are still relevant today, and the message continues to be as important now as it was written centuries ago.

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Continuing from my previous post (Mass Psychology I), I am quoting yet another section of the insightful book I mentioned towards the end of the last article. In my opinion, this book is a work of art and a masterpiece. The author clearly illustrates the pack mentality through events over this lifetime. I have discussed these principles over and over again. Still, it is nice to see that someone born several hundred years ago understood the often misunderstood field of Mass psychology.

As an observer of human behaviour, I have always believed that the education system fails to deliver on its promises. Public education is often inadequate and does not give students the tools they need to succeed. Instead, it stifles creativity and independent thought, turning students into robots trained to repeat information without questioning it. Public education, for the most part, is akin to rubbish.

In fact, a school only prepares one to be a good robot; it kills all forms of independent thought and forces one to accept the stupid and idiotic concept that working in a group is better than doing things alone. Sol Palha

The education system reinforces the pack mentality and trains individuals to work in groups rather than encouraging them to think and act independently. This results in a society of people who follow blindly and have little originality or creativity. They are biological robots performing their programmed tasks without ever challenging the status quo.

We must rethink our approach to education and begin to emphasise fostering critical thinking and independent thought. Only then can we hope to create a society of individuals capable of genuinely innovative and transformative ideas.

Navigating the Financial Markets with an Understanding of Pack Mentality

The moment an individual assumes the title of a master, the pursuit of learning comes to a halt, giving way to a dictatorial mindset. Only the student can continue to progress while the master remains stagnant, vulnerable to being surpassed by a former pupil.

The relentless pursuit of knowledge and personal growth is of utmost importance. A true master of any subject never ceases to learn and develop, recognizing that the world is in a constant state of change and advancement. The masses may adhere to the status quo, but those who question conventions and push the boundaries genuinely make a difference. While the masses find comfort in blindly following the herd, genuine leaders forge their paths and establish new trends.

This principle holds in the realm of financial analysis as well. Rather than simply conforming to the crowd, striving for originality and innovative ideas is crucial. The field of finance is ever-evolving, and one must adapt accordingly. Merely replicating the work of others will not lead to genuine success or mastery.

It is essential to remember that possessing a title does not automatically confer mastery; the continual effort towards self-improvement and progress defines a true master. Let us, therefore, strive to be perpetual students, never settling for complacency in our knowledge. Only through such a commitment can we hope to attain a genuine understanding of ourselves and the world around us.

Regrettably, this pattern of behaviour is mirrored by many present-day market technicians. They appropriate the work of others, add superfluous elements, and attempt to pass it off as their own. What is lacking in today’s financial analysis is fresh insight and new ideas; the majority are content with collaborating, repeatedly repackaging the same vacuous concepts.

Societal Pack Mentality: How it Affects Parenting

Indeed, when it comes to the weightiest and most challenging of human disciplines, I confess that my understanding is confined to the art of child-rearing. It is a task that begins with relative ease in procreation, but once the children are born, a cascade of worries, troubles, and anxieties befall us. During their infancy, their inclinations are so obscure, their potential so uncertain and deceptive, that it becomes exceedingly difficult to form any solid conjecture or judgment about their future selves. Young cubs and puppies swiftly reveal their inherent tendencies, yet as children grow, they readily conform to established customs, opinions, and laws, often altering or concealing their true nature.

Consequently, due to our failure to discern their authentic path, we squander our time and efforts in educating them towards pursuits for which they are ill-suited. Regarding this challenge, I believe it is wiser to guide them onto the best and most beneficial paths without overly fixating on the hints and signs they display in childhood, to which Plato, in my opinion, assigns undue importance.

Abandon Fearful Pack Mentality, Win by Thinking Independently.

Madam, pursuing knowledge is a splendid adornment and a marvellous tool, particularly for individuals of your esteemed status. While I am confident that you, having savoured its delights, will not neglect this essential aspect of your child’s education, I dare to share a personal fancy that contradicts common practice. It is the only contribution I can offer on this matter.

I propose that a young gentleman of noble lineage, who seeks not to acquire knowledge as a means of livelihood or external embellishment, but rather as a means to cultivate and enrich his inner self, should have his friends choose a teacher whose mind is finely crafted rather than heavily burdened with facts. We require a tutor who possesses both attributes. Still, if we had to prioritize, I would place more excellent value on the teacher’s manners and understanding rather than their breadth of knowledge. Furthermore, I advocate for this teacher to approach their role novelty, departing from conventional methods.

Breaking Free from the Pack Mentality: Educate Beyond Brainwashing

Teachers incessantly lecture us as if pouring knowledge into a narrow funnel, and our role is simply to parrot back their words. I propose a complete reform of our approach to education. From the beginning, the tutor should ignite the student’s curiosity and intellectual capabilities. The student should be encouraged to taste and experience things firsthand to make independent choices and decisions. Sometimes the teacher should lead the way, and sometimes it should be the pupil. It is essential to train the student, like a young horse, to trot ahead so that the teacher can gauge the pace and adjust their speed accordingly. This is a great challenge. Only the most disciplined and finely attuned souls can slow down and adapt to children’s rhythm. I find it easier to ascend uphill than to descend.

Our educators should assess the student’s progress not merely through their ability to recall information but by observing the evidence of growth in their life. The student should question and critically evaluate everything they read, never accepting information blindly or relying solely on authority. By doing so, the principles of Aristotle will hold greater significance to the student than those of Epicurus or the Stoics.

They should be presented with many conflicting opinions, allowing them to make their own choices. If they possess the aptitude, they will form their own conclusions; if not, they will remain uncertain. And if, through their reasoning, they adopt the principles of Plato, those principles will no longer be attributed to Plato but to the student themselves. The individual who follows another blindly gains nothing, discovers nothing, and, indeed, seeks nothing.

Exploring Different Perspectives on Pack Mentality in Society

The study examined herd behaviour in the Vietnam stock market from 2007 to 2015, revealing several noteworthy findings. It was observed that herding occurred during this period, with more prevalence on upmarket days, particularly among small-capitalization stocks—the phenomenon of herding manifested in both fundamental and non-fundamental contexts.

Furthermore, the level of herding experienced a significant decrease following the global financial crisis. This suggests that the crisis impacted the behaviour of market participants, influencing their tendency to engage in herd behaviour. It was also discovered that both arbitrageurs and noise traders were involved in herding and interacted with each other within the market.

Findings and Insights: Herd Behavior in the Vietnam Stock Market

The study aimed to investigate herd behaviour by analyzing aggregate market data for stocks and considering the role of different participants with varying levels of information. Various aspects were explored, including the asymmetry of herding in up and down markets, the influence of price limits, and the effects of the recent financial crisis. Additionally, the researchers proposed a new methodology to examine herd behaviour among different groups of investors and enhance existing tests for fundamental and non-fundamental herding.

Based on the findings derived from analyzing data from the Ho Chi Minh Stock Exchange in Vietnam, the study concluded that herding behaviour was more pronounced on up-market days, particularly among small-cap stocks. Additionally, the research identified intentional herding even after accounting for unintentional (fundamental) herding. The results also pointed towards the potential for within-group herding and interactions between arbitrageurs and noise traders within the market. Full Story

Strategies for Achieving Financial Freedom

Break Free from the Herd Mentality

Investing necessitates a rational and analytical approach. It is crucial to engage in comprehensive research and avoid relying solely on the viewpoints of others. The market is unpredictable, characterized by both highs and lows. However, by making informed decisions, one can enhance their prospects of long-term success.

It is advisable to think independently and base decisions on personal research and analysis rather than blindly conforming to the crowd. Achieving success in investing necessitates a profound comprehension of oneself and the market without succumbing to the influence of others’ actions and opinions.

Disciplined Investing: The Key to Averting losses

It is essential to remember that the fact that others are making a specific investment decision does not guarantee its success. Following the crowd often leads to irrational choices and substantial financial losses. Instead of blindly going along with the majority, engaging in independent research is crucial, as assessing the risks involved and making well-informed investment decisions. Adopting a long-term investment strategy with discipline and patience is a safer and more effective approach to maximizing returns.

Avoid Emotional Investing; Stay Disciplined for Long-Term Success

Exercising caution and resisting the influence of hype is crucial in the stock market. Many investors have experienced financial losses due to their inability to control their emotions, particularly fear and greed. During a bull market, the allure of quick wealth becomes hard to resist. Desire intensifies as investors hear tales of extraordinary returns achieved quickly.

Conversely, the fear of losing money can lead to impulsive decisions, such as selling off holdings during a bear market. However, this is precisely when considering purchasing quality stocks at discounted prices—an approach commonly known as “buy low, sell high.” The key to success in the stock market lies in maintaining a calm and patient mindset, conducting thorough research, and implementing a well-defined investment strategy. By doing so, investors can minimize the impact of emotions on their decision-making process and increase the likelihood of achieving long-term success.

Kapur said, “This leads them to speculate, buy shares of unknown companies, or heavily invest in the futures segment without truly understanding the associated risks.” Full Story

Psychology Today’s Views on the Consequences of Pack Mentality

Status represents a fundamental human need for recognition and respect, which we all aspire to fulfil before pursuing higher-level desires. Whether or not we openly acknowledge it, the desire to feel superior to those around us is ingrained. We establish this sense of superiority in our minds through symbols of wealth, such as designer clothing, jewellery, luxury cars, and residing in exclusive neighbourhoods. Even individuals with limited financial means find ways to assert their status through symbolism. The visibility of these status symbols can evoke a potent emotion: envy.

However, the happiness derived from attaining status symbols is often short-lived. These symbols lose significance as time passes, and we yearn for genuine accomplishments that validate our worth. Studies have revealed that once a certain income level is reached (typically around $250,000 per year), an individual’s happiness does not significantly increase until they achieve a super-rich status (earning approximately $10,000,000 per year). Full story

Humans: Pack Animals with the Ability to Communicate

Group polarization is worth considering as it proposes that when individuals who share similar views come together, they tend to reinforce and strengthen each other’s beliefs. This phenomenon can be problematic in the stock market, leading to an intensified herd mentality where everyone makes identical investment choices, potentially creating a bubble.

In such situations, it is crucial to step back and critically evaluate the situation rather than blindly following the crowd. It is advisable to diversify investments and seek guidance from experienced and knowledgeable individuals to make well-informed investment decisions and avoid the pitfalls associated with group polarization.

It is important to remember that successful investing in the stock market requires patience, discipline, and a rational mindset. Emotional and impulsive decisions can result in financial losses, whereas a measured approach supported by thorough research and analysis is more likely to lead to profitable investments.

Experiments showcasing groupthink in action

Cialdini experimented with observing the effects of removing a sign from a path in the park. Surprisingly, the path without the sign experienced a decrease in theft by one-third compared to the path with a warning. Visitors interpreted the absence of the sign as an indication that taking small pieces of wood was acceptable, as previous instances of theft seemed to make it “normal” behaviour.

Social proof has also been utilized to help individuals overcome their fears. In a study led by Albert Bandura and his colleagues, a group of young children who were afraid of dogs were exposed to a four-year-old boy happily playing with a dog for 20 minutes a day over four consecutive days.

After four days, 67 per cent of the children who witnessed the boy playing with the dog demonstrated a willingness to enter a playpen with a dog. A follow-up study one month later revealed that these same children were still ready to interact with a dog. By using the behaviour of the boy playing with the dog as a model, the children were able to modify their behaviour and diminish their fear. Full Story

FAQs on Pack Mentality

What is the author discussing in this text?

The author discusses how the pack mentality can influence various aspects of life, including investing, societal behaviour, parenting, and financial analysis.

The author emphasizes the importance of understanding mass psychology and the dangers of blindly following the crowd. By becoming aware of mass psychology and its influences on the markets, one can make informed decisions and potentially avoid costly mistakes. The author also criticizes the education system for reinforcing the pack mentality and training individuals to work in groups rather than encouraging them to think and act independently. Furthermore, the author states that true mastery of any subject requires constant learning and self-improvement and that the masses are content with blindly following the herd.

What is the message the author wants to convey?

The author wants to convey that the pack mentality can be dangerous and that individuals should strive for independent thought and critical thinking. By understanding mass psychology, individuals can make informed decisions and potentially avoid costly mistakes. The author encourages individuals to challenge the norm and push the boundaries to create innovative and transformative ideas.

The author believes blindly following the crowd and the status quo will not lead to true success or mastery. Instead, individuals should constantly strive for knowledge and self-improvement and challenge the norm to create new insights and ideas. The author also criticizes the education system for reinforcing the pack mentality and training individuals to work in groups rather than encouraging them to think and act independently.

What is the author’s view on the education system?

The author criticizes the education system for reinforcing the pack mentality and training individuals to work in groups rather than encouraging them to think and act independently. The author believes that public education is often inadequate and does not give students the tools they need to succeed. Furthermore, the author states that public education stifles creativity and independent thought, turning students into robots trained to repeat information without questioning it.

The author believes the education system kills all forms of independent thought and forces one to accept the stupid and idiotic concept that working in a group is better than doing things alone. The author believes that we must rethink our education approach and emphasize fostering critical thinking and independent thought.

What is the author’s advice on investing?

The author advises individuals to avoid blindly following the crowd and to always look to historical events and past market behaviour as a guide. By becoming aware of mass psychology and its influences on the markets, individuals can make informed decisions and potentially avoid costly mistakes.

The author emphasizes the importance of understanding mass psychology and the dangers of blindly following the crowd in investing. By becoming aware of mass psychology and its influences on the markets, individuals can make informed decisions and potentially avoid costly mistakes.

What does the author believe is lacking in financial analysis today?

The author believes that new insight and new ideas are lacking in financial analysis today. The majority are happy to work together, repeatedly re-packaging the same nonsense.

In the author’s opinion, new insights and ideas are lacking in financial analysis today. The majority are happy to work together, repeatedly re-packaging the same nonsense.

What is the author’s view on societal pack mentality?

The author believes that the education system reinforces the pack mentality and trains individuals to work in groups rather than encouraging them to think and act independently. Furthermore, the author states that the masses believe in the status quo,

Continuously Enhanced Since June 2015: Latest Update in March 2023