The effect of this bias can suppress the outcome of rational thinking. This cognitive bias influencing public opinion is very much expected in the political field. The results of a public opinion poll before the election have the power to manipulate the voting preference of the voters. Hence, poll results before the election are restricted in countries like Brazil and France.
How Does Bandwagon Effect Work?
The bandwagon effect referring to the phenomenon of more and more people joining the trending practice is coined by the phrase “Jump on the Bandwagon.” Bandwagon indicates the decorated wagon used in circus or entertainment events to carry the performing band. The term originated around the mid-19th century in America. Later, using the bandwagon to carry politicians during political campaigns increased since it created an environment where people wanted to join. Using the bandwagon for the presidential campaign of Zachary Taylor for the first time publicized the phrase “Jump on the bandwagon.”
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Source: Bandwagon Effect (wallstreetmojo.com)
The reason why this bias is so prevalent is simple. People feel safe when they adopt what the majority does. It represents a situation of impersonal influence. People like to win and be on the winning side. They believe that winning is high by following what the majority of winners do. It also emerges when people try to avoid the situations leading to social exclusion. The bandwagon bias influences people regardless of the importance of the decision. Consider the following scenarios:
The impact of this phenomenon of following the majority can be negative or positive. Sometimes it leads people into selecting prolific investment options. But, on the other hand, it also persuades people to use expensive products due to their popularity.
Bandwagon Effect Example
Bandwagon effect in economicsEconomics is an area of social science that studies the production, distribution, and consumption of limited resources within a society., finance, politics, medical science, and psychology is common. Let’s look into an example associated with the stock market.
Stock Market – GameStop (GME)
The bandwagon effect is often visible in investors’ approach towards meme stock. A recent example that profoundly impacted amateur investors and short-sellers took place in January 2021. GameStop’s stock price (GME) trading around a range between $17 to $19 per share at the beginning of January 2021 escalated to $347.51 on January 27. Very soon, the share price dropped below $100 by February 2021.
Short sellersShort Selling is a trading strategy designed to make quick gains by speculating on the falling prices of financial security. It is done by borrowing the security from a broker and selling it in the market and thereafter repurchasing the security once the prices have fallen. were utilizing the GameStop stock to gain from its declining stock price trend. However, the scenario changed when the retail investors started buying the low-priced shares and excited them through the Reddit platform. The rising demand created a challenging environment for short-sellers, and they began to collect the stocks back. As a result, it further increased the demand and resulted in a price rise.
Retail investors decided to buy shares deviating from the rational investment decisions and jump on the bandwagon, bidding the price up. Unfortunately, the inexperienced investors followed the hype propagated in the online platform without conducting studies about the stock, the company’s performance, and lack of awareness about the short-selling or short squeezeShort squeeze refers to the situation that arises when there is an unexpected increase in stock price, adversely impacting the short-sellers, who are then forced to buy the stocks at a higher price to cover their short position and results in a further increase in the stock price. process. Soon, the short squeeze affected the investors engaged in the short-selling of GameStop’s stock, and the price drop impacted the amateur investors who bought the shares with long-term planning.
Why is it Important?
The bandwagon effect plays a critical role in human psychology and decision-making. To better understand human psychology and its effects on society, we need to understand the bandwagon effect and why humans tend to have these herd-like tendencies. Here are a few examples of why it’s essential in today’s society.
Frequently Asked Questions (FAQs)
What is meant by the bandwagon effect?
The effect explains the phenomenon when an individual is exposed to popular views or actions. They are stimulated to adapt to the perceived trend. When people start rallying to the trend or dominant practices in society, more and more people will join it. This practice is mentioned using the phrase ‘jump on the bandwagon.’
What is an example of the bandwagon effect?
One of the examples is the consumer trusting the online stores following the influence exerted by collective opinion. Shopping through online stores is riskier compared to brick-and-mortar shops. The information available about the product is limited, and shoppers cannot touch or check the product. So, shoppers depend on the consumer reviews and shops if the majority review is positive.
What is the bandwagon effect in media?
Media presents collective opinion information to the public, and people perceive it as credible sources. Hence the media coverage can alter people’s attitudes towards many things.
This has been a guide to the bandwagon effect and its Meaning. Here we discuss how the bandwagon effect works and examples and why it is important? You may learn more about financing from the following articles –