Question

Explain in your own words investor psychology and bandwagon effect.

Answer 1

Bandwagon effect is a psychological impact upon people in which they are not acting upon their own beliefs and they are following the herd, so they will be rather replicating what others are doing and they will not believing upon their on fundamentals, so the lack of independence could be associated with bandwagon effect in which investors are primarily following what others are doing and they are not acting upon their own beliefs and concerns because there is a fear of missing out and they feel like others are doing better and maximizing the rate of return.

The investor psychology is related to the bandwagon effect and investor psychology will mean that the investors will be trying to to react throug greed and fear in the market and he will be trying to follow his psychology during investment in the market and maximize his rate of return and bandwagon effect along with investors psychology can be embedded with each other as investors are often following up with the herd mentality during the asset price bubble and they are often buying irrationally during the bull Run.

Hence, the bandwagon effect is related to herd mentality of the investor and he will be trying to follow the belief of the crowd during the asset bull run and price bubbles.