Herd mentality a danger to investors

Investors need to be aware of dangerous behavioural biases, according to Goldman Sachs Asset Management head of UK institutional, Paul Craven, in a presentation at the NAPF in Edinburgh in March 2012. One example of a behavioural bias, Craven said, is the tendency of investors to believe a story rather than the facts. This is one reason for investment bubbles – such as in Japan in the late 1980s, and in the technology sector in the early 2000s – when investors continued to hold stocks at prices which were unsustainable. Another bias is group think, when a group all think on the same lines and no-one challenges the consensus. “It is important to challenge ideas and have a devil’s advocate to provoke discussion and avoid conformity,” Craven said. Group think could also be avoided, he said, by using secret ballots or asking people independently for their views. He added: “Specialists need to be challenged and welcome this, so investors must ignore the fact that they don’t know as much as them.” He also warned investors to be aware of mental short-cuts which could lead them to missing important information. The herd mentality is an example of this, when individuals follow a herd or group action. This can save time in some circumstances, but it not always the best course of action for investors.