14 January 2026
In investing, intelligence isn’t in short supply. Most professional investors have the tools, models, and experience to recognise when markets are overvalued, when consensus has gone too far, or when risk is mispriced.
And yet, time and again, savvy investors follow the crowd - even when they know it’s probably wrong.
They allocate to the same names, lean into the same narratives, and stay in trades long after their own thesis has faded. Not because they lack insight, but because conviction is often no match for consensus.
This is one of the most persistent behavioural traps in markets: doing what everyone else is doing, simply because everyone else is.
Following the crowd isn’t always irrational. Herd behaviour provides comfort, cover, and the occasional real signal. It can also help preserve reputations and smooth peer comparisons.
But when it becomes reflexive - when investors start ignoring their own doubts just to stay in sync - it creates a more profound vulnerability: portfolios that are built on social pressure, not belief.
This is where the risk sharpens because when the crowd gets large enough, even the sceptics lean in.
Imagine a boat at sea. One person walks to the left side - no issue. Then another, then a few more until eventually, everyone’s on the same side.
The boat doesn’t correct. It lists.
This is how consensus works in markets - the more people who crowd into the same trade, the more pressure it puts on the remaining holdouts to join. Not because they believe but because they don’t want to be the last standing.
And when the final former critic leans in? That’s often the top.
Not due to a change in fundamentals, but because balance disappeared.
In that moment, the problem isn’t just that everyone’s positioned the same way. It’s that no one is left to provide stability when the wind changes.
This isn’t just about groupthink or fear of missing out - although those play a role. What’s really happening is a complex mix of behavioural patterns that are hard to separate from sound decision-making.
Let’s unpack a few:
· Social proof bias: We look to others - especially peers - to validate our decisions. In markets, if everyone’s buying, not joining can feel reckless, even if your analysis says otherwise.
· Career risk aversion: Institutional investors, in particular, operate under intense scrutiny. It’s often safer to be wrong with everyone else than to be wrong alone. That pressure warps objectivity.
· Regret aversion: This is more subtle. Investors sometimes avoid making independent moves not because they’re afraid of loss, but because they’re fearful of regretting a bold decision that goes against the herd.
· Herding: In uncertain or fast-moving environments, our instinct is to follow the group. It’s an ancient behaviour hardwired into our risk response system. But in capital markets, it can drive outsized positioning and systemic fragility.
None of these behaviours makes you a bad investor - they make you human. But left unchecked, they can turn a sound investment process into a momentum mirror.
You’ve heard it. Maybe even said it.
“The trade is overextended, but there’s still momentum.”
“Everyone’s in - I can’t afford to miss it.”
“We’ll rebalance soon, just not yet.”
These aren’t expressions of confidence; they’re signals of internal conflict.
You know something’s off, but stepping away feels harder than holding on - especially when peers, performance tables, or committee optics are involved.
That’s when portfolios shift from being belief-driven to reputation-managed. It happens quietly, but the consequences can be loud when the cycle turns.
The true risk isn’t underperformance, it’s something deeper:
A slow erosion of alignment between what you believe and what you hold.
Conviction decay is subtle. It doesn’t show up in daily P&L, but over time, portfolios become less about views and more about visibility.
You start to hold names not because you believe in them, but because everyone else does.
You’ll notice it when:
· Portfolios start hugging benchmarks, even within supposedly active mandates
· You keep telling yourself you’ll rotate out of a crowded trade, just not “yet”
· You’re rechecking peer positioning more than you’re revisiting your own research
It’s not a crisis. It’s drift. But that drift compounds.
You don’t need to be a contrarian just for the sake of it, and you don’t need to abandon consensus entirely - sometimes the crowd is right.
However, you do need to stay honest about what’s driving your decisions.
Here are three simple - but powerful - checks:
These aren’t hypothetical; they’re grounding.
When everyone moves to the same side of the boat, the risk isn’t just imbalance. It’s that the former dissenters, the stabilisers, are now part of the weight.
At that point, the tipping doesn’t happen gradually. It happens all at once.
Conviction doesn’t mean rejecting the crowd. It means knowing when you’re no longer thinking independently - and having the discipline to recalibrate before the boat lists too far.
Because in the end, it’s not what you know, it’s what you do with what you know - especially when it feels hardest to act.
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