It’s fascinating to study the concept of psychology and how it relates to our behavior in the stock market – knowledge many traders lack.
If you focus more on psychology and behavior, it will help with your own trading and success in trading. It allows you to understand your reasoning and look at things in a different way than you have in the past.
I’d love to share with you an experiment I read about involving groupthink…
Groupthink is how you act and think within a group. In the stock market, traders are getting tips and information from many different sources. In a sense, traders are influenced by the groupthink behavior. Therefore, it’s important to understand how we behave in groups.
In this specific experiment, the scientists focused on one individual. They placed this individual into a room with approximately 20 people – all 20 people were working for the scientists.
The scientists showed a diagram to everyone that showcased three lines – A, B, and C; the scientists then asked which line was longest (the answer was evident). C was clearly the longest line, but the 20 people working for the scientists purposely answered the incorrect Line A.
The individual being studied was obviously confused as to why everyone was answering incorrectly, but he began to doubt himself and second-guess himself because everyone else answered Line A. He then tricked himself into believing Line A was longest and answered identically to everyone else.
In groupthink situations, we don’t know what is right or wrong as we begin being influenced by outside sources – their opinions could be shifted or swayed…
The same thing happens in the stock market. You may hear, “This stock is great!” or “This stock is going up!” and ride on those opinions. However, at this point you are no longer making your own decisions and thinking for yourself.
Your opinions and beliefs may then be molded to the opinions influencing you. As humans, we enjoy being part of a group and ‘fitting in’, but it’s important to do your homework and influence your own trading decisions for success.