How to Overcome Herd Mentality and Not be a Sheeple

In order to stay sane, our brains create the illusion that all our thoughts are completely rational and independent. But, no matter how independent-minded you think you are, it is easier — and unknowingly more seductive — to follow a widely-accepted dogma, than create your own. Most people are sociable and have a natural desire to be accepted, rather than being stigmatized as outcasts. Therefore, following a group is an ideal way to become a member, but how can you follow a group and overcome the herd mentality and its negative impacts?

Herd mentality in financial crises

The bursting of the internet bubble is one of the most infamous financial events in recent history. The crash that followed saw the Nasdaq index, which had risen five-fold between 1995 and 2000, tumble from a peak of 5,048.62 in March 2000, to 1,139.90 in Oct 2002, a 76.81% fall. By the end of 2001, most dotcom stocks had gone bust.

Investments favored by the herd can easily become overvalued, as high investment values are usually based on optimism and not fundamentals. Financial markets have experienced this type of event on many occasions, from tulip mania in the 1600s, the great depression, and the last global economic downturn caused by the collapse of the subprime mortgage markets in 2007.