One of the strangest kinds of behaviors that influences the stock markets and contributes the formation of financial bubbles is the “herd” mentality. The people follow the “herd” with hopefully, thinking of benefits in the short term because the stock prices are going up. The boom periods are characterized by good feelings and crises by fear. Be careful, if even your neighbor buy shares, because it means that possibly everybody is buying, and this fact is forcing the price up. In fact, this is an important cause of the instability of markets, because when the herd is exposed to an external factor that represents a shock in general terms, like the twin towers attack , the Gulf war or this crisis, everyone instinctively feels the need to follow and copy the others and the vicious circle begins.
It starts with a moderate fall in the stock prices and cool “thinkers” sell their shares quickly to keep their benefits, others also start to sell, and after the media represents this fall that increases as time passes by. Then the “herd” that needs to follow instantaneously the behavior of cool thinkers, news gurus, economists, media news, and counselors with foolish advice, sell the stocks because they dread the crisis and nobody wants to lose money. Only the greatest risk takers keep their nerves and continue impassive with their behavior. At this moment the crisis starts because the general behavior of unrest will repeat itself during a period of time that should be between 1 and 3 years. However, nobody knows how to confront this kind of situation.
The general trend changes and something that was optimism before is transformed by the situation in to general pessimism. The greatest problem is that few people are making an independent assessment of the situation and this is an essential requisite to obtain good results in the financial markets. Instead of that, the general behavior is the herd mentality that only thinks in short terms.