People in the trading market know that price changes are the result of group behavior, and the group formed by individuals can create huge waves in the market. And the "80/20 rule" is unshakable, which also means that the impact of most group thinking and behavior is negative. How can we recognize and get rid of its impact on our trading?

Human Group Psychology Theory

Gustave Le Bon, one of the most influential social psychologists in France and the author of the seminal work "The Study of the Group Mind," studied human "psychological groups" - a collection of people with the same psychological activity characteristics.

He believes that when the market is relatively calm, traders' focus is scattered and their emotions are relatively stable, and they are just an objective group; but at certain times, they transform into a psychological group. For example, when the market is stimulated by the so-called unprecedented "good news," traders' focus immediately concentrates, and their emotions are quite excited. At this time, traders immediately form a psychological group.

Le Bon's group psychology theory mainly includes the following points:

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1. The theorem of the mental unity of the psychological group:

In the psychological group, the emotions and ideas of all members are unified in the same direction, and the rational individual components are eliminated. At this time, all members of the psychological group have achieved spiritual unity.

According to Le Bon's view, when people's irrational individual components are unified, the combined force formed by the psychological group will be far greater than the sum of the forces of rational individuals. However, this combined force has a destructive nature.

2. The theorem of the low overall intelligence of the psychological group:When a group of people forms a psychological crowd, the intelligence level demonstrated by the group as a whole in decision-making or behavior will be far lower than the intelligence level that the members of the group can demonstrate when making decisions or behaving as individuals.

This has a particularly important warning effect: investors should be especially vigilant about the direction of decisions and actions formed by psychological crowds; investors should be especially vigilant about the "collective decision-making" mechanism: the collective in "collective decision-making" is not necessarily a psychological crowd, but the collective is more likely to transform into a psychological crowd than an individual.

3. Overall psychological characteristics of the psychological crowd:

The overall psychological state of the psychological crowd will have the following three basic characteristics:

(1) Impulsiveness. The direction of its actions is extremely uncertain.

(2) Obedience. It refers to the psychological characteristic of the psychological crowd that is willing to obey external command.

(3) Extremism. It refers to the fact that the actual actions of the psychological crowd often lead to excessive consequences.

This also has an important warning effect on investors:

(1) According to the characteristic of impulsiveness, we can more clearly understand and be vigilant about the rapid movement of prices in the market, thereby more effectively guarding against investment risks.

(2) Its characteristic of obedience is particularly manifested as investors' worship of "authority" and the resulting uniformity in investment concepts and investment behaviors.The extreme characteristics of it can lead to the emergence of irregular cycles in the market instead of regular fixed-wavelength cycles.

4. Theorem of the Thinking Pattern of the Psychological Masses:

The most basic characteristic of the thinking pattern of the psychological masses is:

⑴ Surface-level: The thinking pattern of the psychological masses is characterized by making general conclusions about the commonalities of things based on the superficial connections of the surface features of different things, and they are unable to discover the essential connections between the commonalities and individualities of different things.

⑵ Visualization: The psychological masses have an extremely high level of visual imagination and are very susceptible to the influence of visual thinking methods.

Contrarian Thinking Theory

Based on Le Bon's theory of the psychological masses, American investment analyst Humphrey B. Neill developed the "Contrarian Thinking Theory," which is a methodological system for reflecting on political, economic, and social issues with a broad background.

The Contrarian Thinking Theory is based on the laws of sociology and psychology, and some particularly important viewpoints include:

⑴ The masses are subject to the control of human nature; while individuals may suppress this weakness of human nature.Here is the translation of the provided text into English:

(2) People inherently possess an impulse to "conform".

(3) The nature of mutual influence and imitation among people makes them extremely susceptible to the control of suggestions, commands, customs, emotional stimuli, etc.

(4) The crowd loses the ability to think rationally and is only controlled by emotions.

For contrarian thinkers, identifying the mainstream views in social, political, and economic life or the securities market is the most important, critical, and difficult task. Neal believes that mainstream views often have the following characteristics:

(1) The views of the media often represent the mainstream views;

(2) The views unanimously agreed upon by analysts often represent the mainstream views;

(3) The views often discussed by the general public often represent the mainstream views.

In the market, if a certain view has the above characteristics at the same time, investors can often be more confident in confirming that this view represents the mainstream view of the current market.

The contrarian thinking method has the following basic characteristics:

(1) It opposes precise prediction, believing that socio-economic phenomena are unpredictable;Translate the following passage into English:

(2) It requires maintaining a variety and flexibility of perspectives;

(3) It requires observing issues from a humanistic and realistic angle;

(4) It requires breaking the cyclical pattern of thinking.

To break the cyclical patterns of human weaknesses at different stages of the market, one must adopt a contrarian thinking model. In this way, one can be "afraid" when the investing public is "greedy," and be "greedy" when the investing public is "afraid."

It is particularly important to note that the investment strategy of the psychological analysis school belongs to the type of investment strategy that chooses the timing. Its strength lies in the judgment of strategic investment timing, and it has a relatively accurate grasp in nature. At the initial stage of the market's strategic phase transition process, following this investment theory, investors may observe the process of market nature changes with a calm attitude, and thus formulate corresponding preventive measures and investment strategies. Its main drawback is the poor precision of the timing of entry and exit, which may sometimes result in a significant time deviation. This time deviation may lead to the consequence that investors are eliminated even after making a historically correct judgment.

Conclusion

Investment is about competing with the majority in the market for limited resources. As a rough prediction of market trends, both theories have their advanced and scientific aspects. Although they cannot play an absolute guiding role in trading, their reference value to investors is indeed very practical, preventing subjective conjecture and subconscious behavior, and causing damage to trading.