Thread by @CALC_Finance

Harnessing the herd mentality 🐑🐑🐑🐑

It's obvious that not everyone on #twitter has your best interests at heart but have you ever blindly invested in something because everyone else was doing it?

Why?

A #GrownUpDeFi THREAD: 🧵

What is herd mentality?

→ The tendency of people in a group to think and behave in ways that conform with others in the group rather than as individuals.

This social tendency is a double-edged sword ⚔️

On one hand, it may pay to move against the herd:

1. @michaeljburry shorting the housing bubble in 2007
2. @GiganticRebirth's $UST short
3. Even @NicolasFlamelX exiting $LUNA in size before things went south

Or, in time-sensitive or uncertain situations, it may pay to simply follow along:

1. In the middle of a confirmed run on the bank, you need to exit quickly

2. Aligning yourself with a particular narrative early may pay large investment dividends

The impelling force is that herd mentality facilitates social cohesion and, according to many, has been a major factor propelling us past other great apes.

🧠 Our desire for social cohesion is what drives us to agree with a group even if it contradicts our initial beliefs.

Unfortunately, this feature installed in our genetic code can work against us.

Sometimes social cohesion rivals our critical thinking.

An example:

Have you ever invested in a trending asset right after a pump to only end up with a net loss?

This isn't abnormal as crypto markets often experience behavioral herding.

→ Most investors blindly mimic the behavior of other investors without seeking the rationality behind it.

As asset prices pump and valuation metrics get stretched, FOMO strengthens.

"But Everyone's doing it..."

People grow impatient watching Twitter users and friends make “easy” money. One by one, reluctant investors join the herd despite their concerns.

🎵 An intricate game of musical chairs

The first step before allocating capital is to recognise this pattern and ask yourself:

🦾 "Am I thinking critically?"

🦾"Do I have a strong investment thesis?"

These are imperative questions.

So why do we engage? 🤔

The way we feel about a given return on investment depends not only on the size and direction of the return (see our thread on Loss Aversion👇), but also

→ our position RELATIVE TO OTHERS 📈

This thinking is a deep-seeded instinct. Any animal that became 'too content’ was quickly outpaced by those seeking more than their neighbours, and this resulted in lineages of descendants that have inherited the predisposition to want more than their neighbours.

💭 Watching your mates make a 10x from the sidelines can hurt more than the small loss itself.

Read more about #FOMO here:

What are some popular theories behind herd mentality?

👉 Pattern-Based Model
👉 Transmission-based model

Pattern-Based Model:

This model contends that people follow the crowd because they believe there is no way that they could be right and everyone else could be wrong. It promotes the idea that people lack self-confidence in their own ideas.

Transmission-based model:

This model can be summed up as ‘peer pressure’. We may find the path of least resistance by conforming to group views rather than challenging them (think #XRParmy)

🔦 There is of course a dark side to the herd mentality in crypto. Groups of people use herd mentality to their advantage and strategically coordinate movements to drive herds of individuals to invest in a particular asset.

📉 You become their exit liquidity.

Despite the dark side, we don’t want to eliminate the herd mentality entirely.

In emerging markets where fundamental analysis of the tech is exceedingly difficult, crowd sentiment can occasionally be one of the better indicators of success we have.

In fact, paradigm-shifting tech arguably relies on herd movement. Cryptocurrency is being designed so that it can be used without a deep understanding of blockchain technology and its fundamental philosophical principles

🔮 Hype and herding are part of the shift! 🔮

➕ But we do need to be calculated when it comes to our decision to accept or reject the herd

Our job is to tease apart the paradigm-shifting cases that deliver deterministic value from baseless and speculative hype.

Things to think about:

- Does the tech have deterministic value?

- Is my investment long-term or swing?

- Am I thinking critically or being swayed by social cohesion?

- If the tech is paradigm-shifting, it's probably not going anywhere. Do I have to jump in RIGHT NOW?

If you want to take the calculated approach, we’re building the tools to help you

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calculated.fi

This is thread number three of our new content series called:

➕ ✖️ Calculated Thinking ➗ ➖

We hope you've found this thread helpful.

**None of this information is financial advice, it is for educational purposes only. #nfa

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