To make profits, break out of the herd

The instinct to follow the herd is hard-wired into our brains, but it doesn't make for profitable investing. Striking out on your own may be daunting, but, as Tom Bulford explains, it can lead to much higher gains.

A fascinating letter in The Times has drawn my attention to an article in the neuroscience journal, Neuron. The piece was entitled 'Reinforcement Learning Signal Predicts Social Conformity'. What it revealed is relevant to you and all investors.

The gist of it is that our brains are geared to mimic our peers. When we fall in line with the consensus our brains release a chemical called dopamine. That makes us feel good. On the other hand, going against the crowd triggers a neuronal response that makes us feel uncomfortable. And the more uncomfortable we feel, the more likely we are to make 'subsequent conforming behavioral adjustments'. In other words, we're likely to change our mind and go along with crowd after all.

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Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.