The bandwagon effect is the concept used to explain how individuals follow the majority’s decisions, behaviors, or styles. The result can be observed in nearly every aspect of our everyday lives, from purchase decisions to voting preferences.
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.
- The bandwagon effect reflects the phenomenon of individuals adopting decisions or conduct just because everyone else is doing it.
- People’s day-to-day activities are influenced by the effect, like the selection of movies to watch, the clothes to wear, and the goods purchased.
- It profoundly impacts specific social sciences such as economics, psychology, and politics that influence and shape the world around us.
- Understanding this cognitive bias’s influence may help people make efficient decisions by sticking to rational choices.
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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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.read more 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.read more 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.
- Helps consumers: Public opinion about goods and services is significant in the decision-making process. When comparing two different products or services, many people will choose the better reviews without researching any other information.
- Helps businesses: The bandwagon effect also extensively influences supply and demand. Economists will look to the bandwagon effect when extreme shifts occur in the demand curveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more. It’s also crucial for businesses to understand this concept to prepare for these events.
- Investment decisions: The bandwagon effect has been chronic in investments and financial marketsThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more. It helps drive bull marketsA bull market occurs when many stock prices rise 20% from a recent low, with the price climb spanning for an extended period.read more and occasionally results in a stock market bubbleA stock market bubble is a phenomenon in which the prices of a company's stock are inflated and cannot be supported by the company's actual performance, resulting in a divide between the real and financial economies caused by irrational exuberance of market participants, herd mentality, or any other similar reason.read more. One of the main reasons the effect occurs with investments is that people love to win, especially when it comes to finances. So when someone sees other individuals making money through stocks or other assets, they want to get in and start making money too.
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.
Recommended Articles
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 –
- Behavioural Economics
- Endowment Effect
- Heuristics