Understanding Mass Psychology

Mass Psychology is grossly misunderstood field and this is why we have come up with the understanding mass  psychology series.  It is often confused with the notion of contrarian investing.  In fact, the two only share a few common traits. Contrarians usually jump in and out of the markets too early. They bail out well in advance of the top and miss on the largest part of the move, and jump in too early and  reduce their upside gains.  In most cases, these contrarians are fashion contrarians which means that they choose the title because it sounds cool and they usually lose more than they make on a given day or year.

Wikipedia makes the following comments regarding mass Psychology or Crowd psychology

Crowd psychology, also known as mob psychology, is a branch of social psychology. Social psychologists have developed several theories for explaining the ways in which the psychology of a crowd differs from and interacts with that of the individuals within it. Major theorists in crowd psychology include Gustave Le Bon, Gabriel Tarde, Sigmund Freud, and Steve Reicher. This field relates to the behaviors and thought processes of both the individual crowd members and the crowd as an entity.[1] Crowd behavior is heavily influenced by the loss of responsibility of the individual and the impression of universality of behavior, both of which increase with the size of the crowd.

We tend to view mass psychology as taking a position that would even surprise the toughest of contrarians.  We wait for the markets to froth, for a feeding frenzy stage before bailing out and vice versa before jumping in.

The following articles will help provide some insight into this wonderful but overly misunderstood field.

A clear Illustration of the Mass Mindset In Action

Mass Psychology Introduction

Mass Psychology Part I, Sept 26, 2007

Mass Psychology II, Oct 2, 2007

Mass Psychology III Oct, 9, 2007

comic strip Illustrating mass psychology in action

Other articles of interest:

Avoid These Common Stock Investment mistakes

Technical Analysis

Why Mechanical and Technical Analysis Systems Fail

The Limitations of Trend Lines

Contrarian Investment Guidelines

Inductive Versus Deductive reasoning

Portfolio Management Suggestions

Ultimate Timing Indicator

Esoteric Cycles

 

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  • Financialbloke

    Too true. I’ve found myself oh both sides of the coin.
    This reminds me of defussion of innovation, the rate new ideas and technology are adopted by people. I can see some parallels with investing. There are multiple stages: innovators, early adopters, early/late majority, and the laggards. The amount of people in each stage is basically a standard deviation graph. With the least amount of people being innovators (far left of graph) and laggards (far right of chart). The majority of people are in early/late majority (middle of the chart).