In 2005, 450 sheep jumped to their deaths.

One sheep dove. Another followed. All of a sudden, a flock of sheep began jumping off a cliff for no real reason. Shocked shepherds would watch as another 1,500 jumped.

Hundreds of sheep perished, as they got caught up in herd mentality. Each followed and jumped simply because every other sheep was doing it. And as uncommon as this may sound, it’s not.

In fact, this very same thing happens each and every day among traders and investors. We buy because everyone else does. We sell because every one else does. But, we never question what we’re really buying or selling, which can be quite costly. Instead, we take the leap simply because every one else is doing it. And if every one else is doing it, it must be right. Right? Well, not exactly…

In 2009, Kiplinger’s ran an article by Robert Frick, titled, “Don’t Trust the Crowd.”

It noted:

“What's scary about the herd mentality is how insidiously it gets you to see things differently. In fact, a recent experiment showed that we may actually be hard-wired to believe what the crowd tells us. In the experiment, conducted at Emory University, participants were asked to look at an object (an assemblage of cubes) and then judge how it would look if it were rotated slightly. But there was a twist: Other participants – who in reality were actors hired for the experiment – were instructed to give wrong answers in an attempt to sway the opinions of their fellow participants.”

“Sure enough, the real subjects, influenced by the actors, gave incorrect responses, despite what their own eyes told them. Brain scans found that participants didn't just decide to go along with the crowd. Instead, the crowd's opinion actually changed their perception of the problem. Participants "saw" the objects differently. The herd, it seems, alters our perception of reality.”

What allows a Wall Street participant to think outside of the herd is the awareness of just how easily we are influenced, as also highlighted by that article. “Then you can concentrate on the smartest investing strategy: spreading your risk across many types of investments and periodically redistributing your money among them.”

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