Much has been written about crowd and group behavior in the investment industry, but one aspect that has received little attention is emotional contagion. As the term suggests, people can infect each other behaviorally. And in the field of investment, this can cost everyone a lot of money.
The term contagion has a negative connotation from its customarily application in the field of medicine and disease. Still, the term is very apt in the context of investment, because contagion frequently leads to irrational or imprudent behavior. It prevents “healthy” evaluations of investment opportunities, and gets in the way of sound judgment in decision-making.
Contagion leads to the classic blunders associated with following the crowd – buying into the market when prices are high, and fleeing in panic when they drop. Contrarian behavior, generally the best (or even, arguably, the only) way to really make money, is, by definition, undermined by emotional contagion.
How Does Contagion...
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