The trap of group behavior in stock market trading


Many investors have this experience. Seeing that the media, friends and colleagues are talking about making money in stocks, they can't help but open an account and enter the market. Seeing that everyone is buying a certain stock, they can't help but buy large sums of money. Unconsciously, he has fallen into the trap of crazy group behavior. So what is group behavior? How is it produced? What are the serious consequences of short-term, crazy group behavior? How can investors avoid falling into this trap?


   Group behavior is a phenomenon in which people unconsciously act in concert based on "collective norms or opinions of the majority". Group behaviors are common in many areas of social life. For example, netizens' pursuit of "sharp brothers", "Weng'an" and other social group events are all examples of group behaviors. In a stock market bubble or a big crash, investors along with others buy or sell stocks desperately, completely disregarding the value of the stock itself, forming a crazy stock trading group behavior.

   The two outstanding characteristics of group behavior are "the minority follows the majority" and "unconsciousness". The former refers to individuals who lose their independent judgment in group decision-making and follow the majority of people with a conformity mentality; the latter refers to individuals who follow the group’s actions not intentionally, but fall into an unconscious state after losing the ability to think independently . Regarding the "unconsciousness" of group behavior, German writer Friedrich Schiller once commented: "Any person, as an individual, is sufficiently sensible and reasonable, but if he is a member of a group, Become an idiot immediately".


   Why do people give up their own ideas and are willing to obey the opinions of most other people like idiots? There are two main reasons. The first is to "combine with the group" and fear being abandoned by the group. The weak in nature tend to act collectively to resist the attacks of higher species, such as "flocks" and "horses". People who are social animals are no exception. They are born with a gregarious mentality that is consistent with most people's actions to seek safety. The second is the lack of information. I feel that others may have information that I don’t have, so it’s safer to imitate most people’s practices. Therefore, in the stock market, many retail investors follow the trend of "blindly following", and chasing the rise and the fall are all irrational group behaviors carried out under emotions such as "group pressure" or "social influence."

  Of course, there are often specific factors in the occurrence of group behavior in the stock market. The first is "structural incentives", such as the high sentiment caused by overheating of the market, and the high attention to the listing of new shares caused by the long-term suspension of new shares. The second is the "specified group of people". In the Chinese stock market, investors with new accounts, young leaders, small scale, lack of trading experience, and high risk appetite are highly clustered. Then there is the "motivating factor", which may be the introduction of some major policies, or some market rumors, or even a certain large order that appeared in the market. Finally, there is the "internal strengthening mechanism", that is, based on the "market" as the link, investors have formed an amplification contagion mechanism and a circular feedback process of "buying more and more, buying more and more", resulting in continuous strengthening of group behavior. The combination of these factors has resulted in frequent group behaviors in the Chinese stock market.


   Whether you are a scholar, businessman, politician, soldier or civilian, you will become a member of group behavior under certain circumstances. This has been confirmed in many fields such as psychology and sociology. For example, during the French Revolution, thousands of citizens of Paris tortured and killed more than 1,500 monks and nobles in prison within a few days, and even children of twelve or thirteen years old were not spared. The unconsciousness of group behavior brought about A thrill of breaking through depression, being bold, and not blaming the public. Another example is that in the "Bay of Pigs Incident" in the United States, President John F. Kennedy's cabinet made a wrong proposal to invade Cuba, but it was passed because everyone unconsciously obeyed the group decision. In the stock market, when everyone is buying frantically while stock prices are rising, even the old lady who knows nothing about stocks can't help but pour in.

   It can be said that the nature of conformity as a person, whether it is admitted or not, is objective. The information asymmetry in the stock market makes investors with fewer sources of information tend to imitate the behavior of other investors, so this is also a market-oriented phenomenon.


   It cannot be denied that in the long run, group behavior has its positive effects. For example, after the railway bubble in Britain and the United States, the basic framework of the national railway network was constructed. After the Internet bubble dissipated, the US information infrastructure has reached a new level.

   However, short-term, crazy group behaviors often cause social or stock market turbulence, and in severe cases, they can cause systemic risks. In the brewing process of crazy group behavior, a small event may break the balance of the entire group and cause a concentrated outbreak of group power, and no one can predict who, when, and in what way will break this balance. This is exactly the horror of such group behavior. For example, in the recent Dow plunge by 1,000 points, some people said that it was a trader who placed a wrong order, then it was a programmatic transaction, and then it was a hedge in the middle of the United States. There are different opinions on the result of the fund selling index option contracts in large numbers, but no matter what force broke the balance of the market, the plunge really happened. At the same time, individuals who participate in such group behaviors often face huge losses. In an authoritative study of the Shenzhen Stock Exchange, the overall loss ratio of individual investors who bought 22 sample stocks on the first day of listing reached 51.28%, and the average loss ratio of individual investors' accounts was even as high as 99%.


   First of all, we should strengthen the learning of securities knowledge and gradually form our own investment style instead of using blind trading methods such as "following the crowd" and "following the main force". This is the fundamental way to avoid falling into group behavior.

  Secondly, it is necessary to calmly think, analyze carefully, adjust your emotions, and do not make follow-up decisions when your head is hot.

   Again, don't trust all kinds of false news and rumors circulating in the market, and consciously pay attention to the clarification announcements announced by listed companies or exchanges, and reduce the possibility of participating in group behaviors in the first place.

Finally, short-selling mechanisms such as margin trading and stock index futures are gradually established. The checks and balances of long and short forces will be more convenient and effective. Therefore, investors should consider all kinds of information on long and short when making decisions, comprehensively analyze and prudently act. It's not just "slap your head" all the way up.