Overcoming Herd Mentality in Investing

Most of us believe strongly in the potential we have in Web3 to achieve financial success. We must always remember, however, that as humans we are subject to the emotional/psychological factors that often derail enthusiastic investors. One of these factors is the herd mentality. 

A recent survey conducted by the CFA Institute Financial NewsBrief identified herding as the behavioral bias that affects investment decisions the most. Herd behavior is seen when individuals end up inadvertently acting together as a group without planned action. It is usually caused by people putting faith in influencers, information cascades or the inherent need in humans to feel as if they belong.

The social media dynamics of the Web3 movement have provided an interesting forum to study this dynamic. Crypto Twitter provides an echo chamber of both hype and FUD, while conveying a false sense of authority to those who have large followings. NFT token-gated Discord communities give access to resources and alpha, while also augmenting a subtle sense of peer pressure to fit in with the crowd in their degen investing behaviors. 

Some people utilize these networks to organize systems of intensive research to coordinate well-planned out group actions. Others take the degen route and ape into risky plays with their digital companions 24/7. This article is not attempting to analyze which of these strategies is more effective or profitable. It is simply to note that socio-psychological factors like herding can sometimes derail our cognitive and emotional decision-making systems.

While most influencers protect their liability by always announcing, “this is NFA,” and advising their audience to “DYOR,” the fast-pace of the market and the fear of missing out on sudden opportunities cause us to easily fall into old-brain/aping, instead of utilizing our new brain/frontal lobe. 

These dynamics accentuate how important it is for prominent members of the Web3 community to be cautious of the influence they may wield. More importantly, however, those of us participating and seeking alpha and opportunities within Web3 need to have a clear plan and budget for how many degen risks we want to take, while also having a clear understanding of how to protect ourselves from the abundance of scams and security risks this cyber-frontier presents us with.

The idea here is that, by being aware of the socio-psychological dynamics that affect us, we can have a better chance of dominating our emotions and making clear, well-thought-out decisions. This, of course, will not guarantee that our decisions will always be successful, but it does allow us to keep our eyes on the road and our hands on the wheel as we pursue our investment goals.

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