How Financial Trends Are Misleading You—And What You Can Do About It
Never confuse popularity for quality
“Those who follow the crowd usually get lost in it.”
-Anonymous
The bandwagon effect is just what it sounds like; it's when people do something because they see lots of others doing it too.
I first noticed this with sports fans.
I've been a hardcore Toronto Raptors fan since I was 11, right from when Vince Carter joined the team. Being a Raptors fan was mostly a bummer for a long time. The seasons usually ended with us either way down in the rankings or getting knocked out early in the playoffs—often in the most heartbreaking or humiliating possible fashion.
But everything changed when the Raptors won the championship in 2019. It was like suddenly everyone in Canada was a huge Raptors fan.
You could see outdoor viewing parties for their playoff games in almost every town. We longtime fans started calling these new people "bandwagon fans" because they only started liking the Raptors when they were winning.
The bandwagon effect means the more popular something is, the more people want to jump on board. This is okay when it's about sports, but when it comes to money, making choices just because everyone else does can end really badly.
Why celebrity endorsements work
If you're over 30, you might remember the George Foreman grill. This grill that you could use right on your table was everywhere in the late 90s and 2000s.
I remember how cool I felt bringing one to my dorm in 2007. Even the little grease trap felt unique and somehow made people think that hot dogs were healthier if you were able to drain the grease out of the pan.
George Foreman, the famous boxer, made around $200 million just by putting his name on it. The company making them sold over 100 million of these grills, largely off the name association with George Froeman.
This is a classic case of the bandwagon effect in shopping. At first, people bought the grill because of Foreman, but then it got so popular that everyone wanted one, whether they cared about Foreman or not.
A study in 2015 showed that young people would pay a lot more for an iPhone if it was endorsed by a celebrity they liked. This shows how the bandwagon effect makes us buy fancy stuff we don't really need and spend too much on it so that we can feel like we aren’t missing out.
The Bandwagon Effect and Investment Bubbles
Investment bubbles are an important example of the bandwagon effect.
A paper in 2021 talked about how this works. The researcher found that bubbles are more likely when past successes get people excited and convince others to join in. When people buy stuff hoping its value will go up, they don't just sit around. They try to get others to buy it too, because that's how they'll make money.
When the price of something starts going up, it's easier to get more people interested. This is the bandwagon effect in action. As more people get on board, the price goes even higher. This can turn into a dangerous loop and is how bubbles get started. The paper also talked about how much media attention something gets can help predict if it's going to turn into a bubble.
A cautionary tale: Canadian Weed Stocks
Canadian weed stocks are the perfect example of how the bandwagon effect creates financial bubbles.
In 2017, the North American Marijuana Index was created. The index tracks the performance of publically traded companies active in the marijuana industry.
In 2018, Canada legalized recreational marijuana.
Investors got excited, and a number of thematic ETFs were created that invested in companies selling legal weed.
After legalization, The North American Marijuana Index increased by 150% within a few months in the fall of 2018—the point at which many excited investors jumped on the bandwagon.
Companies selling legal weed saw their valuations skyrocket. After all, weed is a “growth industry.”
After an extremely volatile year, the market for legal weed companies peaked in late 2019.
At the time I write this, the North American Marijuana Index is down 88% from its 2019 peak and is actually lower than before weed became legal in Canada.
Popularity is not a reliable indicator of quality
Staying away from the bandwagon effect is tough.
We often think if something's popular, it must be good–but that often is not the case. This is really important to remember when it comes to money.
Just because a lot of people are into something doesn't mean it's a smart choice. This is especially true for online financial advice where just because someone has a ton of followers doesn't mean they know what they're talking about.
Here are three tips to avoid the bandwagon effect
Give Yourself Some Space and Time to think
Ever felt pressured by what everyone around you is doing or saying? The trick is to step back and give yourself some space.
A good tip for shopping is to use the "24-hour rule." If you want to buy something that's not a must-have, wait for a day before you buy it. This gives you time to think about why you want it and if it's really worth the price. This can help you figure out if you're just getting caught up in the hype or if it's something you really want.
Slow Down and Break It Down
If you want to take emotion our of your decision making, and make the most rational choice possible try not to rush your decisions. Take your time to really chew over what you're about to do.
Break it down like you're explaining it to a friend. What are the pros, cons and pitfalls? Saying it out loud or jotting it down can make a world of difference.
Own Your Choices and Look at All Angles
Remember, at the end of the day, you need to be accountable for your own decisions.
Don’t just jump on a bandwagon because it's rolling past. Take a moment to look at the other paths you could take. Maybe there's a less popular choice that's actually better for you. Picture how each choice plays out. How does it make you feel? If it turns out great, awesome! If not, no stress – it's all part of learning to trust your own decisions.
In the end, while the bandwagon effect might seem no big deal in things like which basketball team you root for. But, it can have serious consequences when it comes to money.
Understanding this, and knowing when you might be getting swept up in the hype, is key to making smart choices, not just in what you buy, but in how you invest your money.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
Ben, this article resonated but first, let me first say 'Vinsanity'! I still watch his highlights on YouTube. What an amazing dunker.
People behave like a crowd when it comes to money. I'm no exception - I must often resist the urge to jump on the bandwagon when my friends speak of the "next big thing". Consensus is a high price to pay in the stock market.