Consider this. You visit your usual sweet shop and find that the owners have parted ways and have set-up shop adjacent to each other. You do not know which shop to patronise. How will you decide? It turns out that you will most likely use behavioural psychology to make your sweet decision. How?

We often look for evidence to take a decision, especially when we are unsure of our choice. Often, evidence is the crowd inside each shop. It is most likely that you will consider the crowded shop to be the better one. Why?

You presume that the other patrons made a conscious choice to enter the shop. The crowd, therefore, suggests that the shop offers better quality products than its competitor. You are, in other words, banking on “wisdom of the crowd”. Of course, it could be just as well that the crowd in one shop was purely random. Confused? Take this example.

Getting antsy

You drop two lumps of sugar not far from each other in your living room . You know that ants will soon populate the area. They do not, however, divide their attention between the lumps. Instead, the lead ants randomly choose one lump. And as you watch the ants clinically collect the sugar , you will notice that the population would most often drift towards one lump. Why?

Ants realise that there could be danger near the food source. If an ant returns with food, it means the source is safe. And that prompts other ants to access the same source.

Our behaviour mimics that of the ants in many ways. Whether it is buying sweets or stocks, we mostly follow the crowd, as we take comfort in large numbers. Besides, we often consider it better to be wrong with the crowd than risk being right alone! This behaviour typically leads to boom and bust in the markets, and explains why portfolio managers herd and why some brands are popular.

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