Why do we tend to follow the crowd? It feels easier and safer even if it isn’t
The cartoon proves a simple (and often amusing) human truth: We are all susceptible to following the crowd. We often don’t even realise that we are doing this. It is human behaviour to look for visible and easy to understand prompts to help us make decisions. In this example, the ‘easy prompt’ is the sign saying ‘fast queue’. Who wouldn’t want to be in the fast queue?
Why do we find it hard to be different?
The more people that join the fast queue, the more valid their behaviour seems and the more we are attracted to do the same. However, ‘valid’ is not necessarily best or optimal. The irony in the cartoon proves this, as people will actually end up spending a lot more time in the so-called ‘fast queue’ instead of joining one of the other queues. While it may feel uncomfortable to join a queue labelled ‘slow’, the price of not doing so and following the crowd would (as shown in the cartoon) actually be a longer wait. This is at the heart of herd behaviour – there is a cost involved.
How can ‘following the herd’ when you invest cost you money?
When you invest, following the herd is a poor way to make decisions, because it is more likely to increase your risk and reduce your returns. If a certain share is popular, there will be many willing buyers, and they have to compete with each other to buy it. So the price rises. The higher the price you pay, the lower the prospective return, and the greater the risk you take on. This is a large price to pay for being part of the crowd.
At Allan Gray Australia, we pride ourselves on being different
Our contrarian approach involves looking for unpopular shares so that we can pay less, instead of paying more. We know there’s a price for following the herd – and we know there’s a potential reward for being different.