The Bandwagon Effect, as its name suggests, refers to the phenomenon in which people make a particular choice only because they see others making that choice. When it comes to investment decisions, the Bandwagon Effect is a common occurrence. That’s a problem for a few reasons:
The investments that are most susceptible to this effect are the ones that are the most frequently talked about—on the news and in conversation among investors. Because of their popularity, these investments can become overpriced. That’s why Warren Buffett often says, “What the wise man does in the beginning, the fool does in the end.”
There’s a common belief that “the market” is intelligent or that “the market” knows something. I once heard a professional investor say, “The market is telling us something.” The flaw in this logic is that the market is simply a collection of other individuals and, because of that, it is not endowed with any special wisdom or insight.
