Be a conscious investor by ensuring the Lollapalooza effect does not hit you
The markets are a bundle of emotions, with greed and fear as the primary drivers. Then how can investing not be subject to the sway of emotions?
There are various psychological aspects to investing, with herd mentality as the widely prevalent one.
So, what causes herd mentality?
Lollapalooza Effect
Financial markets are where various events, emotions and event-driven emotions collide.
While there is order in the marketplace at the surface, the undercurrents that shape the transactions move at a fast and furious pace.
Among these, the Lollapalooza Effect emerges as a formidable tide, resulting from the interplay of multiple biases, tendencies, and mental models that shape the market’s direction.
The dictionary states lollapalooza as a person or thing that is particularly impressive.
The term, Lollapalooza Effect, coined by astute US businessman and ace investor Charlie Munger, highlights the synergy of various psychological forces leading to significant, often unexpected outcomes.
Munger coined the term after reading various textbooks on psychology and the works of Gordon Allport and Daniel Kahneman.
The Lollapalooza Effect and Market Dynamics
In the marketplace, the Lollapalooza Effect dons various masks. It nudges investors into making investment decisions, which can, at times, weaken portfolio stability and impact returns.
Investor behaviour shaped by biases, and when combined with trends, in-vogue talk and hype, results in volatility.
Among the recent instances is the fancy for trading in cryptocurrency.
FOMO due to Lollapalooza Effect
The Fear of Missing Out (FOMO) can be a result of the Lollapalooza Effect, as it often involves multiple psychological biases and forces acting together.
Here's how various elements can converge to create FOMO:
Social Proof: People see others (often on social media platforms) participating in activities, making certain investments, or purchasing particular products.
This creates psychological pressure to conform or follow the crowd based on the assumption that others’ actions are correct.
Scarcity Bias: The perception of scarcity of an opportunity or product can lead to FOMO.
When something is scarce or limited, people assign it more value, and the fear of missing out on obtaining this valuable item or opportunity can create FOMO.
Availability Heuristic: Frequent exposure to certain events or products, especially on social media and news platforms, can make people overestimate the importance or value of those events or products.
This constant exposure can contribute to FOMO as individuals feel they are missing out on something important or valuable.
Loss Aversion: People prefer avoiding losses rather than acquiring equivalent gains.
The potential regret of missing out on an opportunity can be a strong motivator for action, contributing to FOMO.
Recency Bias: People often give more weight to recent events.
If they see others recently gaining benefits from a certain opportunity (like a booming investment), they may fear missing out, leading to FOMO.
Consumer Behaviour and Lollapalooza Effect
FOMO can lead to impulsive buying decisions as consumers fear missing out on limited-time offers or trendy products that others are purchasing.
A well-known personality's endorsement of a product can lead to increased consumer trust and interest, creating a bandwagon effect that further amplifies consumer response.
This, along with social media marketing and other promotional strategies, significantly impact consumer behaviour and sales.
Recently, the Securities and Exchange Board of India moved to cut the influence of financial influencers or ‘finfluencers’ who were attracting investors through their social media handles.
SEBI also banned financial organisations from collaborating with unregistered finfluencers to ensure that such endorsements don’t create a misplaced following.
Finally, the lollapalooza effect might have gained wider currency because of Munger, but Charles Mackay had alluded to it in 1871.
He had then advocated the need to differentiate rather than imitate, avoid groupthink and stray from the pack.
So, suno sabki karo apni ! Loosely translated, it means listen to everybody but act based on your thinking.
Isn’t that what #sensibleinvesting is all about?
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