The bandwagon effect is one psychological phenomenon wherein the rate of approval of fads, ideas, trends, and beliefs increases the more they get adopted by others. In simple words, the bandwagon effect is the one where people do something because other people are already doing it.
The tendency to follow the others’ beliefs or actions occur as individuals either confirm directly, or they derive information from others. For instance, social pressure has been used extensively to explain the conformity of this experiment.
Although the term originated from politics; however, it has implications on investment and other consumer behaviours as well.
The definition of bandwagon refers to a wagon that carries a band during a parade, circus or any other entertaining event. It was in 1848 when the phrase “jump on the bandwagon” got appeared in American politics when Dan Rice, a famous circus clown used his bandwagon and music to gain attention for a political campaign.
As the campaign acquired success, other politicians struggled to get a seat on the bandwagon, hoping to get linked with the success of Dan Rice.
Often, consumers economize the cost of acquiring information and evaluating the quality of consumer products by relying on the opinions and purchasing patterns of others. To an extent, this could be useful only if the preferences of the two people are similar.
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In the financial and investment markets, the bandwagon effect could be quite vulnerable as similar types of psychological, social and information-economizing factors occur. Along with that, prices of assets may increase as more and more people jump onto the bandwagon.
This can, however, create a positive feedback loop of increasing prices and more demand for an asset. For instance, during the late 1990s, several tech startups came into industries without any viable plan, products or services.
In fact, most of them were not even ready to Handle Market pressure. All they had was a domain extension with either “.com” or “.net” suffix. What remained unusual here is that despite having no experience or knowledge, these companies attracted a lot of investment as a large part of the bandwagon effect.