What Is the Bandwagon Effect?
The bandwagon effect is a mental phenomenon where individuals accomplish something fundamentally on the grounds that others are making it happen, no matter what their own convictions, which they might overlook or override. This inclination of individuals to adjust their convictions and behaviors to those of a group is likewise called a herd mentality.
The term "bandwagon effect" begins from politics however has wide ramifications regularly found in consumer behavior and investment activities. This phenomenon should be visible during bull markets and the growth of asset bubbles.
Understanding the Bandwagon Effect
The bandwagon effect arises from mental, humanistic, and, somewhat, economic factors. Individuals like to be in the triumphant team and they like to signal their social identity.
Economically, some amount of bandwagon effect can appear to be legit, in that it permits individuals to conserve on the costs of gathering data by depending on the information and assessments of others. The bandwagon effect pervades numerous parts of life, from stock markets to apparel trends to sports being a fan.
In politics, the bandwagon effect could make residents vote for the person who seems to have more famous support since they need to have a place with the majority. The term "bandwagon" alludes to a cart that helps a band through a motorcade. During the nineteenth century, a performer named Dan Rice ventured to every part of the country campaigning for President Zachary Taylor. Rice's bandwagon was the focal point of his campaign events, and he energized those in the crowd to "get on board with that fad" and support Taylor.
By the mid twentieth century, bandwagons were typical in political campaigns, and "get on board with that fad" had turned into a derogatory term used to depict the social phenomenon of needing to be part of the majority, even when it means conflicting with one's principles or convictions.
Consumers frequently streamline on the cost of gathering data and assessing the quality of consumer goods by depending on the feelings and purchasing behavior of different consumers. Somewhat, this is a beneficial and helpful inclination; in the event that others' inclinations are comparable, their consumption choices are rational, and they have accurate data about the relative quality of accessible consumer goods, then, at that point, it checks out to follow their lead and effectively outsource the cost of gathering data to another person.
Nonetheless, this sort of bandwagon effect can make a problem in that it gives each consumer an incentive to free-ride on the data and inclinations of different consumers. To the degree that it leads to a situation where data with respect to consumer products may be underproduced, or created exclusively or generally by marketers, it very well may be censured. For instance, individuals could buy another electronic thing in light of its notoriety, whether or not they need it, can bear the cost of it, or even truly need it.
Bandwagon effects in consumption can likewise be related to conspicuous consumption, where consumers buy costly products as a signal of economic status.
Investment and Finance
The bandwagon effect has been distinguished in behavioral economics too. Investing and financial markets can be particularly defenseless against bandwagon effects on the grounds that not exclusively will a similar sort of social, mental, and data conserving factors happen, yet furthermore the prices of assets will quite often rise as additional individuals get on board with that fad. This can make a positive feedback loop of rising prices and increased demand for an asset, related to George Soros' concept of reflexivity.
For instance, during the dotcom bubble of the late 1990s, many tech startups arose that had no suitable business plans, no products or services ready to bring to market, and generally speaking, just a name (as a rule something tech-sounding with ".com" or ".net" as a postfix). Notwithstanding ailing in vision and scope, these companies pulled in huge number of investment dollars by and large due to the bandwagon effect.
- The bandwagon effect is when individuals begin accomplishing something since every other person is by all accounts getting it done.
- The bandwagon effect starts in politics, where individuals vote for the candidate who seems to have the most support since they need to be part of the majority.
- The bandwagon effect can be ascribed to mental, social, and economic factors.
How Might One Avoid the Bandwagon Effect?
To limit the bandwagon effect, individuals can benefit from pursuing independent choices that are free from the bias of pariahs, which is logical easy to talk about, not so easy to do. Taking an alternative or contrarian position can likewise help.
Who First Identified the Bandwagon Effect?
The term "bandwagon" comes from the 1848 U.S. presidential election. During Zachary Taylor's fruitful campaign, a well known performance jokester welcomed Taylor to join his circus bandwagon. Taylor received a lot of prestige, and individuals began claiming that his political rivals could likewise need to "get on board with that temporary fad."
Why Is the Bandwagon Effect Important to Investors?
The bandwagon effect can lead investors to follow the crowd, which might bring about asset bubbles or crashes, in the event that assuming the crowd is buying or selling. Regardless, individuals might invest for fear of missing out (FOMO) as opposed to making individual assessments of investments and doing due diligence. Buying or selling basically in light of the fact that every other person is by all accounts doing it can lead to awful results.