6. Envy: Engaging in Herd Mentality
Envy is a desire to have what someone else has. Herd mentality is the equivalent of envy in the investment world. This behavioral finance concept refers to investors who follow the crowd and invest in what’s popular without concern for valuations or one’s individual circumstances.
“Investors tend to be very sociable beings, especially during the time of a stock market bubble,” said Ricciardi. “These individuals base their decisions on the first piece of information to which they are exposed, such as an initial purchase price of a stock.”
“This crowd psychology causes the individual to expect a stock price to continue increasing for an unlimited time horizon,” he said. “Once the bubble bursts, this will result in severe losses for the individual investor.”
A herd mentality led investors to follow the crowd and buy into the technology boom while prices were at the peak, only to watch their investments come crashing down. There have been regular, calamitous market meltdowns over the past 50 years. Avoid herd mentality by understanding your own personal risk profile, investing time horizon and stock market history.