The markets’ “herd mentality” is no secret. Examine any recent bubble and you’ll see it in full action. But exchange traded fund (ETF) investors can fight this phenomenon with a simple strategy.
Jason Zweig of The Wall Street Journal reports that some of the most informative answers to our questions about dramatic market moves such as the “flash crash” can be found in science labs. According to Zweig, studies have shown that “the value of something is likely to go up when other people tell you it is worth more” and vice versa.
In the study, researchers had 28 people submit a list of songs they wanted to buy online. Then while “a magnetic resonance imaging machine recorded the patterns of activity in their brains,” the participants were told how two music experts had rated the songs on their list.
“The brain scans showed that as soon as people learned they had chosen the same song as the experts, cells in the ventral striatum— a reward center wired with dopamine neurons that respond to pleasures like sugar and sex—fired intensely.” [Podcast: Trend Following Through Summer.]