By now, all those who have access to smartphones and are regular users of online services must have ordered food online at least once. It may not be a far stretch to say that they most probably would have used the online food ordering services of either Swiggy or Zomato, not that other such services are inferior to these brands.
The reach of Zomato and Swiggy is so wide-ranging that they have virtually become synonymous with online food ordering. The fact that the names of these brands are used as verbs for ordering food online is proof of their mass appeal and reach.
But there is a catch. While the highly satisfying services, marketing models, user-friendly interfaces, and tonnes of new-age features of these companies cannot be discounted in gauging their success, there is more to it than what meets the eye. When people start doing something because everybody else seems to be doing it, a chain effect begins.
As more people started shifting to online with the ease of technological access, they started using online services more actively. And this expansion of online services’ users boosted further user expansion for brands like Swiggy and Zomato to a significant extent simply due to the imitation effect.
The tendency of people to take specific actions or decisions primarily because others do the same thing is called the bandwagon effect. This phenomenon has been seen in various fields such as economics, politics, and psychology.
‘‘
The bandwagon effect works through a self-amplifying mechanism. It uses a positive feedback loop to expand, which means the impact becomes more robust as more people join.
Bandwagon effect in investment and finance
The bandwagon effect has a swaying impact on the financial and investment markets. Stock markets are heavily dependent on the rise and fall of information-economising, psychological, and social factors. The prices of assets tend to rise as more people jump on the bandwagon of what others are doing. This results in a positive response to increasing costs and growing demand for assets, and vice versa.
During the Dotcom Bubble of the late 1990s, entrepreneurs incorporated many companies with no practical business plans and minimal end products or services. They were just names with “.com” or “.net” as the suffix in several cases. Yet, despite their lack of foresight and plan, these companies attracted millions of dollars in investment, mainly because of the bandwagon effect. No wonder only a handful of dot-com era companies, including Amazon and eBay, are thriving today.
Effect in financial markets
Price bubble
Price bubbles are common in financial markets, especially as higher-ranking security prices continue to rise. The price is likely to exceed baseline in such a case, causing the security to be highly overvalued. The reason behind it is that many investors line up to buy the security, which raises prices and attracts more investors.
Liquidity holes
In case of unforeseen events or news, a business’s activities can be suspended until the situation is clarified to market participants. This cuts down the number of sellers and buyers in the market and reduces the liquidity drastically. This phenomenon adds more confusion and uncertainty amongst investors and is extremely hard to recover from.
Initial Public Offering
Sometimes the bandwagon effect arises from a company’s initial public offering (IPO). Once the offers are announced, and investors see that the stock is doing well, they often rush to the first day of trading. The motivation for the rush is that stocks are cheaper when they are listed fresh. This creates a demand that temporarily drives the stock price up. However, when investors have time to gauge the stock’s earnings and expectations later, their enthusiasm settles, and the bandwagon effect recedes eventually.
Investing and the bandwagon effect
The bandwagon effect is synonymous with herd behaviour. This effect is seen in practice when investors have too much faith in others and base their strategy on copying what others do. The bandwagon effect thrives on the investor’s fear of missing out. This, in turn, forms an unsustainable financial trend in the market.
Due to the bandwagon effect, investors may seek a significant stake in trending stocks, or even sectors, due to too much buzz and excitement surrounding them. Another place you can see the effect is when investors sell out stocks because of crash presumptions or buy into them for the same reasons for short selling. Whatever may be the goals, investors rally behind the herd because of the bandwagon effect.
Interestingly, this trend often occurs when investors are unwilling to buy stocks above the market or rush to sell stocks below the market. The stance, without a doubt, goes against the logical route of sustainable profit-making in stock markets. Essentially, herd behaviour is motivated by the groups’ enthusiasm and not by information and technical analyses.
What can be your best plan of action?
Investment decisions should always be based on data and logic; they are usually more dependable for intelligent investment decisions than herd trends. While looking at herd trends is essential, you should primarily look at them to learn what others believe and not what you should do. Ultimately, you need to build on your research and experience and make smart decisions based on essential technical elements rather than jumping on the bandwagon.
