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Unlocking the secrets of crypto group mentality with behavioral finance

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TLDR:

  • Herding behavior is hardwired into human behavior and can heavily influence global asset markets, especially cryptocurrencies, leading to sharp volatility.
  • While herding offers a sense of safety and security in groups, blindly following the herd can have undesirable effects, causing FOMO and contributing to irrational investment decisions.

Crypto Behavioral Finance: Why Do We Tend To Follow The Herd?

Herding behavior is deeply ingrained in human nature, impacting global asset markets like cryptocurrencies with extreme volatility. The phenomenon of herding is well-documented in the animal kingdom, and humans are no exception to this tendency.

Experts such as Dr. Simon Moore, Richard Lehman, and David Nussbaum have shed light on why people follow the herd. According to Moore, humans are social creatures seeking safety and resources within groups, which can lead to a tendency to act in alignment with the majority. Lehman and Nussbaum also echoed similar sentiments, pointing out the benefits of learning from and copying the behavior of others.

However, blindly following the herd can have negative consequences, as evidenced by historical financial bubbles and crashes. Investors who bought Bitcoin at its peak in late 2021 faced significant losses as the cryptocurrency’s value plummeted. This highlights the importance of discerning when to follow the herd and when to exercise caution in financial decision-making.

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