Do you think for yourself?

You're Something of a Phenomenon

Very few people ever think about things like this but to me the behavior of Bee Hives or Ant Colonies is an extraordinary phenomenon.  I know this sounds like a weird concept and you may think that you shouldn't waste your time thinking about it, but a rudimentary understanding of it will help your investments.  In a Hive or a Colony there are literally millions of individuals minds or individuals thinking or acting upon their own individual thoughts or instincts without regard or consideration of what the Hive or Colony is doing.  Yet somehow by these millions of separate individualistic actions the colony is capable of making group decisions.  An ant or a bee just does what it does and I assume they really don’t think too deeply.  I’ve yet to see a bee or ant read Shakespeare or play chess.  (Of course, stupid humans generally don't play chess or read Shakespeare either)

For example, Army Ant Colonies in the Brazilian Rain Forest somehow know that they need to move before the floods come and they successfully take journeys of miles. I highly doubt that the Queen Ant is sending out emails or Tweets telling the Colony what to do.  Somehow the Queen understands that it is time to move and as far as we know, She communicates with the Ants that are immediately next to her and they communicate with the Ants that are immediately next to them and so on and so and so on.  And yet somehow the Colony as an aggregate Group behaves like an individual and knows that it is time to move and it (or they) know just exactly what to do and when to do it.

The important thing to understand is that the individual Bees or Ants have what could be understood as two motivations when they pretty much do anything or take any action.  On the one hand the individuals think they are acting upon their own wishes and desires and motivations and they are.  But not only are they thinking and acting for themselves.  They are also responding to the stimuli and influences that they receive because they have a relationship with and are a member of a crowd or a group.  This external stimuli influences their decisions even though they may not be consciously aware of it.  A crowd is larger than the sum of its parts and each individual’s behavior is altered when they become a member of a crowd.

 

The Psychology of the Human Crowd

You may not know it but this behavior also occurs in humans as well.  We may think that we are thinking for ourselves and that we are independent.  But in fact we are thinking for ourselves but at the same time we are also thinking for the group as well...just like a bee or an ant does.  We are not islands.  Thoughts and actions are not absolute or isolated...they are in fact a response to external stimuli and need to be considered as a reactionary dynamic.  Psychologists used to think that our decisions were basically mechanical and individualistic but now they realize that most of the time we are making decisions because we are also responding to eternal stimuli and our decisions are essentially a result of our relationship with our environment.  We need to understand that our actions thoughts are kind of a two-way street.  You may think that your thoughts are your own but they are influenced heavily and maybe even determined by relations to the environment. 

Why does this happen?  Because we as human beings are animals and the part of our brains that cause us to have rational thought has only recently evolved.  The part that makes us animalistic has been there much longer.  Back in the old days, and those old days consist of hundreds of thousands if not millions of years, the Flight or Fright response worked.  If you were scared because you were about to become the afternoon snack of a Saber Tooth Tiger, adrenalin was a good thing.  Your instincts would kick in and you singular focus would be to fight or or flight and get out. 

But when you are scared in the markets its a bad thing.  We can lose control because our instincts can become more powerful than our ability to be self-aware.  The markets have only existed for a few centuries which is just a blink in time compared to how long our animal instincts have been developing.   Instinct wants to make you run with the pack because this reduces your chance of being the prey.  But if you can remember that the market isn't a Saber Tooth Tiger and you can use logic to make decisions when the rest of the herd is fleeing you can find successful trades.  

 

The Proof of this is Everywhere

The proof of this everywhere. I used to witness strange behavior every day in our fellow humans at Grand Central Station when I worked in NYC.  Every day you see people crowding into the first car of the train.  As more passengers walk by and see this they too crowd into the first car until all of the seats are full.  People get angry and complain to the Conductor because they can't find a seat.  But if they only went around this crowd and headed towards the front of the train they would realize that the cars in the front are empty.  There are literally dozens of empty seats and everyone can sit comfortably.  This is a prime example of group or herd behavior in action that you can literally witness every day. 

Think of how this dynamic also plays out in fashion.  You may disagree over whether a tie is nice or ugly, but you have still accepted the fact that ties in general look nice.  That is because you are part of a group and you have somehow come to accept that this is the right or correct way of fashion.  But think of how ridiculous we think fashions in other cultures or in the past are.  Those guys wearing pantaloons back during Shakespeare’s day thought they looked as cool as the Hipsters do now with their skinny jeans.  (FYI-they both look stupid...)

This herd phenomenon is also obvious in other areas or our culture as well.  Think about sports.  People who don’t know each other can form an immediate relationship and have an acceptance of others just because they are wearing the shirt of a specific team.  This is a powerful example of how strong the herd or crowd mentality still is in modern humans.  There are literally countless example of people being hurt or even killed because they happened to be rooting for the wrong team at the wrong place.  Had these people and the people that harmed them met under different circumstances wearing different clothes they may have become the best of friends.   Obviously the same behavior is easily recognized in the crowd dynamics associated with politics, religion, music and so on…

 

Summary

We have individualistic motivations but we also have group, crowd, or herd motivations as well and sometimes they are even more powerful.  What happens when we become a member of a crowd?  Instincts, emotions and biological drives cause people to act differently as members of the crowd than they do as individuals.  We need to understand that when this happens sometimes we lose our ability to reason and think logically because it causes the suppression of self-awareness and emotions to overcome reason.

In the market participants are members of a crowd because they have a common objective and that is to make profits.  When you enter a position you become a member of this crowd.  This dynamic ensures that by definition stock market behavior is a crowd phenomenon.  People tend to identify themselves with their positions and this is a dynamic that drives bubbles or crashes.  In a bubble people are members of the crowd who have made profit so they can all relate to the same stimuli.  It's the same thing with crashes and fear – at least if you are wrong you did what everyone else did so you don’t have to feel stupid.  The leader of this crowd is literally the market itself...as personified by the numerical levels of stock indices or stocks as reported on the news.

If you realize and have a self-awareness that you are a member of the herd, it will be much easier to separate yourself from it and utilize logic instead of emotions to make decisions.  And not only will this benefit your trading and investing, it will benefit other areas of your life as well.