Social media has become ingrained in our daily lives, but for investors, this could come at a cost.
A Wall Street Journal article discusses the impact between knowing what others are thinking and the performance of one’s investment portfolio in the next market crash.
The article cites a 2013 paper from neuroeconomists Benedetto De Martino and colleagues, then at the California Institute of Technology, that shows that people who are able to infer another person’s state of mind also show brain activity associated with increased betting during bubble markets.
The paper suggests that investors who are more attuned to the behavior of others are more inclined to herd behavior. As a result, they are more likely to join the “irrational exuberance” during the building of a market bubble or the panic selling after the bubble has burst.
Given that social networks such as Facebook and Twitter make it easier for us to learn about other people, they may also make us more sensitive to market gyrations.
Having a solid financial plan insulates us from getting caught up in short-term market swings. In addition, some of the most successful investors have made their money running against the herd. Here are some valuable articles from AAII to help you weather the next market storm:
- David Dreman’s Contrarian Approach to Stock Selection
- Being a Contrarian Means Thinking Differently
- Is the AAII Sentiment Survey a Contrarian Indicator?
These articles are only a few examples of the many benefits of AAII membership. To learn more, consider a risk-free 30-day Trial AAII Membership to start becoming an effective manager of your own assets.