Definition
Bandwagon Effect
The bandwagon effect is the tendency to do something primarily because many others are doing it, regardless of one's own analysis — a close cousin of herd mentality.
In markets, it drives crowds into trending stocks, hot IPOs, popular fund categories or buzzy asset classes simply because they are popular, often inflating prices beyond fundamentals. The more people who join, the stronger the pull on others to follow, creating self-reinforcing manias.
The bandwagon effect makes you a price-taker at the worst times — buying as enthusiasm peaks. Independent analysis tied to your goals, and a willingness to sit out crazes you do not understand, protect you from being swept along just as the bandwagon nears its stop.
Related terms
- Herd MentalityHerd mentality is the tendency to copy the financial decisions of a crowd — buying what everyone is buying and selling when everyone panics — instead of relying on independent analysis.
- Bandwagon EffectThe bandwagon effect is the tendency to do something primarily because many others are doing it, regardless of one's own analysis — a close cousin of herd mentality.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.