ভিড়ের আচরণ How crowds behave

The largest rises and the largest falls in a market are the same phenomenon: everybody running the same way at once. This lesson is about that run, because recognising it means at least not being at the back of it.

The important thing first: the people in a crowd are not fools. At every step their decision looks reasonable, and in the short run it is often right. The problem is not in any individual's logic, it is in where the system goes.

The cycle

It starts with a genuine reason: the economy is doing well, rates are low, a sector really is producing good results. Prices rise, and the rise is deserved.

At the second stage the rise itself becomes the news. People buy because the price is going up, not because of anything at the company. That turn is where a bubble begins, and it is nearly invisible from outside, because in both stages prices simply go up.

At the third stage, people who have never bought a share begin buying: neighbours, colleagues, rickshaw drivers, interviews on the news. The crowd is largest at exactly the worst moment.

At the fourth something happens, often something small, and prices start falling. Those who borrowed hit a margin call and are forced to sell, which drives prices lower, which triggers more calls. The rising loop runs backwards.

Why sensible people join in

Worth understanding, because you cannot recognise it in yourself without it.

The first reason is informational: others buying looks like they might know something. Mostly they know nothing; they are watching others too.

The second is social: people around you are making money while you sit still, and that feeling is stronger than reasoning. English calls it FOMO, and there is no good Bangla word for it, and the feeling is familiar to everybody.

The third is professional: a fund manager who loses with the crowd keeps their job and one who loses against it does not. So institutional money often joins the crowd too.

Twice in Bangladesh

The cycle has run in full at least twice here, in 1996 and in 2010. Both times the pattern was the same: a flood of new investors, easy borrowing, prices on companies with no relationship to their earnings, then a fall and a long recovery.

Both times the worst damage fell on those who arrived last and those who arrived with borrowed money. The only reason to remember the history is so that the next one looks familiar.

Three defences

1. A written rule. A fixed amount on a fixed day each month. It stops you buying more in the excitement and stops you stopping in the panic.
2. A written reason for every purchase. If, when you write it, the reason turns out to be that the price is rising, you are in the crowd, and it is visible on paper.
3. No borrowing. In a crowd cycle debt makes you a forced seller, and a forced seller sells at the worst price.

Check yourself