Tales from Wall Street – The Bandwagon Fallacy: When Everyone’s Wrong Together
The fallacy of assuming something is true or right because many people believe it.
In 1929, the American stock market was soaring to unprecedented heights. Everyone, it seemed, was getting rich. Taxi drivers were giving stock tips, shoeshine boys were trading securities, and ordinary families were mortgaging their homes to buy shares in companies they’d never heard of. The prevailing wisdom was simple: since everyone was making money in stocks, stocks were the path to prosperity.
The scale of the speculation was unprecedented in American history. Between 1920 and 1929, the Dow Jones Industrial Average increased from 71 to 381, a gain of more than 400%. Trading volume exploded from 236 million shares in 1923 to 1.1 billion shares in 1929. By the peak of the boom, an estimated 25 million Americans—one in five—owned stock, compared to just 4 million in 1920.
The Psychology of Mass Delusion
Charles Mitchell, the president of National City Bank, exemplified the bandwagon mentality. He declared that the market had reached “a permanently high plateau” and that the economic fundamentals supporting the boom were unshakeable. Irving Fisher, one of the most respected economists of the time, argued that stock prices had reached “what looks like a permanently high plateau” and showed no signs of decline.
These weren’t fringe voices or amateur speculators—they were the most respected financial minds of their generation. Mitchell ran one of the largest banks in the country and was considered a financial genius. Fisher was a Yale professor, a pioneering economist, and the inventor of the modern theory of interest rates. Their endorsement of the bandwagon mentality gave it intellectual credibility that made it even more dangerous.
The bandwagon effect was self-reinforcing. As more people invested, stock prices rose, which attracted more investors, which drove prices higher still. Anyone who questioned the sustainability of the boom was dismissed as a pessimist or a fool. After all, how could so many people be wrong?
This self-reinforcing cycle is what economists now call a “positive feedback loop”—a situation where the initial action creates conditions that encourage more of the same action. In the stock market of the 1920s, buying begat buying, which begat more buying, until the entire system became divorced from underlying economic reality.
The psychological appeal of the bandwagon was irresistible. People who had never shown interest in finance suddenly became expert stock pickers. Housewives organized investment clubs. Office workers spent their lunch breaks at brokerage houses, watching the ticker tape and placing trades. The activity felt sophisticated and modern, a sign of participation in the new economy.
The Democratization of Speculation
The 1920s saw the democratization of stock speculation in ways that had never been possible before. New financial instruments like installment buying and margin trading made it possible for ordinary people to participate in the market with limited capital. You could buy stocks with as little as 10% down, borrowing the rest from brokers who were happy to lend at high interest rates.
Radio and mass media spread market information faster than ever before. For the first time, people across the country could follow stock prices in real-time and feel connected to the action on Wall Street. This created a sense of shared participation that amplified the bandwagon effect.
The cultural narrative of the 1920s also supported the bandwagon mentality. This was the era of the “New Economy”—a time when traditional rules supposedly no longer applied. New technologies like automobiles, radio, and aviation were transforming American life. Consumer goods were becoming mass-produced and widely available. The economy seemed to have entered a new phase of permanent prosperity.
Investment trusts—the precursors to modern mutual funds—made it easy for small investors to participate in the market. These trusts pooled money from many investors and claimed to offer professional management and diversification. In reality, many were poorly managed or outright fraudulent, but their popularity reinforced the idea that everyone could and should be in the market.
The Media Amplification Machine
The media amplified the bandwagon effect. Newspapers ran stories about ordinary people who had become millionaires through stock speculation. Radio programs discussed the latest market trends. Popular magazines featured articles about how to pick winning stocks. The message was clear: everyone was doing it, everyone was winning, and anyone who wasn’t participating was missing out.
The Saturday Evening Post, Ladies’ Home Journal, and other mainstream publications regularly featured success stories of ordinary Americans who had struck it rich in the stock market. These stories followed a predictable pattern: a regular person makes a small investment, sees it grow, makes larger investments, and becomes wealthy. The implication was clear—this could happen to anyone.
Financial journalism of the era was often little more than cheerleading. Newspapers had financial incentives to promote market participation, as brokerage houses were major advertisers. The line between journalism and promotion was often blurred, with financial writers acting more like marketers than objective reporters.
The rise of financial radio shows created a new form of mass communication around market activity. Shows like “The Friendly Philosopher” and “The Old Counselor” featured hosts who dispensed folksy wisdom about investing, making the complex world of finance seem accessible and safe for ordinary people.
Book publishers cashed in on the market mania with titles like “How to Win in Wall Street” and “The Art of Speculation.” These books promised to reveal the secrets of successful investing and reinforced the idea that market success was available to anyone willing to learn a few simple rules.
The Institutional Enablers
The few voices of caution were drowned out by the chorus of optimism. When some economists warned about overvaluation and speculative bubbles, they were ignored or ridiculed. The bandwagon had become so large and so loud that dissenting voices couldn’t be heard above the noise.
The institutional structure of American finance in the 1920s was designed to amplify the bandwagon effect rather than counter it. Banks were allowed to own brokerage houses and investment trusts, creating conflicts of interest that encouraged speculation. Regulatory oversight was minimal, and what regulation existed was often ignored or circumvented.
The Federal Reserve, which had been created in 1913 to provide stability to the financial system, was itself caught up in the bandwagon mentality. Rather than using its tools to cool speculative fever, the Fed kept interest rates low and money supply growing, fueling the very speculation it should have been controlling.
Professional economists, with a few notable exceptions, were swept up in the optimism. The dominant economic theory of the time, known as the “efficient market hypothesis,” suggested that markets were self-correcting and that prices reflected all available information. This theory provided intellectual cover for the bandwagon mentality.
Even the few economists who expressed concern about market valuations were often ignored or marginalized. Roger Babson, who had been warning about overvaluation since 1926, was dismissed as a chronic pessimist. Alexander Dana Noyes of the New York Times was one of the few financial journalists who consistently questioned the boom, but his warnings were overwhelmed by the chorus of optimism.
The Spectacular Collapse
On October 24, 1929, the bandwagon hit a wall. Black Thursday saw the stock market lose 11% of its value in a single day. The crash continued for weeks, ultimately wiping out trillions of dollars in wealth and triggering the Great Depression. The people who had been so certain that everyone couldn’t be wrong discovered that everyone could indeed be wrong—catastrophically wrong.
The collapse was swift and merciless. On October 24, 1929, 12.9 million shares were traded—a record that stood for decades. The ticker tape couldn’t keep up with the volume of selling, leaving investors in the dark about the true extent of their losses. Banks that had been lending money for speculation found themselves holding worthless collateral. Investment trusts that had promised safety and diversification saw their values collapse.
The human cost was staggering. Individuals who had borrowed money to buy stocks on margin found themselves not just wiped out but owing money to brokers. Families lost their life savings. Small businesses that had invested their working capital in the market found themselves unable to pay their bills. The wealthy saw their fortunes evaporate, while the middle class discovered that their dreams of prosperity had been built on borrowed money and false promises.
The psychological impact was as devastating as the financial impact. People who had been confident in their financial acumen suddenly realized they had been gambling with money they couldn’t afford to lose. The social networks that had encouraged speculation—investment clubs, office pools, neighborhood discussions—became sources of shame and recrimination.
The Devastating Aftermath
The aftermath was brutal. Families lost their life savings. Businesses went bankrupt. Banks failed. Unemployment soared to 25%. The very people who had been following the crowd found themselves abandoned by that same crowd as everyone scrambled to save themselves.
The Great Depression that followed the crash lasted for a decade and affected every aspect of American life. By 1932, the Dow Jones Industrial Average had fallen to 41, a decline of 89% from its 1929 peak. Industrial production fell by 46%. Construction virtually stopped. Agricultural prices collapsed, forcing millions of farmers into bankruptcy.
The social consequences were equally devastating. Breadlines formed in major cities. Shantytowns called “Hoovervilles” sprang up on the outskirts of urban areas. Families were separated as people traveled in search of work. The birth rate declined as couples postponed having children they couldn’t afford to raise.
The bandwagon effect that had driven the boom now worked in reverse. As people lost confidence in the market, they withdrew their money, driving prices lower, which caused more people to sell, creating a downward spiral that seemed impossible to stop. The same psychology that had driven prices to unsustainable heights now drove them to equally unsustainable lows.
International consequences were equally severe. The crash triggered a global depression as American investment capital was withdrawn from foreign markets. International trade collapsed as countries erected trade barriers to protect their domestic industries. The economic instability contributed to political instability in Europe, ultimately helping to create the conditions that led to World War II.
The Anatomy of Collective Delusion
The 1929 crash revealed the dangerous illusion at the heart of the bandwagon fallacy. Popular opinion doesn’t create truth, and widespread belief doesn’t guarantee success. The fact that everyone was buying stocks didn’t make stocks a good investment—it made them overpriced and vulnerable to collapse.
The crash demonstrated several key characteristics of bandwagon thinking:
Momentum Over Analysis: People were buying stocks not because they had analyzed the underlying companies, but because prices were rising. The momentum itself became the justification for participation.
Social Proof Substitution: Rather than doing their own research, people used the behavior of others as evidence of correctness. If everyone was buying, buying must be right.
Expert Validation: The participation of respected figures like Charles Mitchell and Irving Fisher provided intellectual cover for what was essentially herd behavior.
FOMO (Fear of Missing Out): The fear of being left behind drove people to participate even when they knew they were taking risks they couldn’t afford.
Confirmation Bias: People sought out information that confirmed their decision to participate while ignoring warning signs that suggested the boom was unsustainable.
The Modern Technology Parallels
The bandwagon fallacy continues to influence our choices in business and personal life. When we assume that popular decisions are automatically correct decisions, we lose our ability to think independently and critically. The 1929 crash reminds us that sometimes the safest place to be is away from the crowd, even when the crowd seems to be having all the fun.
The Dot-Com Bubble (1995-2000): The internet boom of the late 1990s followed a remarkably similar pattern to the 1929 crash. Everyone was investing in internet companies, regardless of their profitability or business model. The bandwagon mentality was so strong that companies with no revenue were valued at billions of dollars simply because they had “.com” in their name.
The Housing Bubble (2003-2008): The real estate boom that led to the 2008 financial crisis was driven by the same bandwagon thinking. Everyone believed that housing prices could only go up, so everyone was buying houses, often with borrowed money. The idea that “everyone can’t be wrong” about real estate proved just as false as it had been about stocks in 1929.
Cryptocurrency Mania (2017-2018): The cryptocurrency boom saw ordinary people investing their life savings in digital currencies they didn’t understand, simply because everyone else was doing it. Social media amplified the bandwagon effect, with success stories going viral and creating FOMO that drove more people to participate.
Meme Stocks (2021): The GameStop and AMC trading frenzy demonstrated how social media can create modern bandwagon effects. People bought stocks not because of fundamental analysis but because everyone on Reddit was doing it. The bandwagon mentality was explicit—participants talked about “diamond hands” and “going to the moon” together.
The Social Media Amplification
Social media has dramatically amplified the power of bandwagon effects in ways that weren’t possible in 1929:
Viral Spread: Ideas can spread to millions of people in hours, creating instant bandwagon effects that can move markets or change behavior before anyone has time to analyze the underlying logic.
Echo Chambers: Social media algorithms create echo chambers where people are primarily exposed to information that confirms their existing beliefs, making bandwagon effects more powerful and resistant to correction.
Influencer Culture: Social media influencers can create bandwagon effects by promoting products, investments, or ideas to their followers, often without disclosing their own financial interests.
FOMO Amplification: Social media makes it easier to see what others are doing and harder to ignore trends, amplifying the fear of missing out that drives bandwagon behavior.
Instant Gratification: Social media provides immediate feedback and validation, making it easier to join bandwagons without careful consideration of consequences.
The Corporate Bandwagon
In business, bandwagon effects can be equally dangerous:
Management Fads: Companies often adopt popular management strategies not because they’re appropriate for their specific situation, but because everyone else is doing it. Examples include Total Quality Management, Six Sigma, and Agile methodologies that are sometimes applied without regard for organizational fit.
Technology Adoption: Businesses often rush to adopt new technologies because competitors are doing so, rather than carefully evaluating whether the technology serves their specific needs.
Market Entry: Companies sometimes enter new markets or product categories simply because competitors are doing so, without adequate analysis of their own capabilities or market conditions.
Acquisition Strategies: Merger and acquisition waves often reflect bandwagon thinking, with companies making acquisitions because it’s what everyone else is doing rather than because it creates value.
Pricing Strategies: Companies sometimes follow competitor pricing without analyzing their own cost structure or value proposition, leading to price wars that benefit no one.
The Political Bandwagon
Political processes are particularly vulnerable to bandwagon effects:
Electoral Campaigns: Candidates often see their support grow or decline based on perception of momentum rather than policy positions. People want to back a winner, creating self-fulfilling prophecies.
Policy Adoption: Politicians often support policies that are popular rather than policies that are effective, leading to suboptimal outcomes.
Public Opinion: Polling can create bandwagon effects where people change their opinions to match what they perceive as the majority view.
Media Coverage: News coverage often focuses on who’s winning rather than substantive policy differences, amplifying bandwagon effects.
Fundraising: Political donations often follow bandwagon patterns, with successful fundraising creating momentum that leads to more successful fundraising.
The Consumer Culture Trap
Consumer behavior is heavily influenced by bandwagon effects:
Fashion Trends: Clothing and style choices are often driven by what everyone else is wearing rather than personal preference or practical considerations.
Technology Adoption: Consumers often buy new gadgets because everyone else has them, rather than because they need the functionality.
Restaurant Choices: People often choose restaurants based on popularity rather than food quality or personal taste.
Entertainment Consumption: Movies, TV shows, and music often become popular because they’re popular, creating cycles where success breeds more success.
Brand Loyalty: Consumers often choose brands based on their popularity rather than objective quality or value comparisons.
The Investment Trap Continues
Modern financial markets continue to be plagued by bandwagon effects:
Momentum Trading: Many investors buy stocks that are rising and sell stocks that are falling, creating momentum that can disconnect prices from underlying value.
Sector Rotation: Investors often move money between sectors based on what’s popular rather than fundamental analysis.
IPO Frenzies: Initial public offerings often see extreme price movements based on hype rather than careful analysis of the company’s prospects.
Cryptocurrency Volatility: Digital currencies experience extreme price swings driven largely by bandwagon effects and social media sentiment.
ESG Investing: Environmental, Social, and Governance investing sometimes reflects bandwagon thinking more than careful analysis of long-term value creation.
The Educational Bandwagon
Educational institutions are not immune to bandwagon effects:
Curriculum Trends: Schools often adopt new educational approaches because they’re popular rather than because they’re effective for their specific student population.
Technology Integration: Educational technology adoption often follows bandwagon patterns, with schools buying expensive systems because other schools have them.
Assessment Methods: Testing and evaluation methods often spread because they’re popular rather than because they accurately measure student learning.
Admissions Practices: Colleges often change admissions policies to follow trends rather than to serve their institutional mission.
Ranking Games: Schools often make decisions based on what will improve their rankings rather than what will improve student outcomes.
The Healthcare Bandwagon
Healthcare is particularly vulnerable to bandwagon effects because of the complexity of medical decision-making:
Treatment Fads: Medical treatments sometimes become popular before their effectiveness is fully established, leading to overuse or inappropriate use.
Diagnostic Trends: Certain diagnoses can become fashionable, leading to overdiagnosis or misdiagnosis.
Technology Adoption: Healthcare institutions often adopt new technologies because competitors have them rather than because they improve patient outcomes.
Pharmaceutical Prescribing: Doctors sometimes prescribe medications that are popular rather than those that are most appropriate for specific patients.
Administrative Policies: Healthcare organizations often adopt management practices that are popular in other industries without considering their appropriateness for healthcare settings.
The Psychological Mechanisms
Understanding the psychology behind bandwagon effects helps explain why they’re so persistent:
Social Proof: People use the behavior of others as evidence of what’s correct, especially in uncertain situations.
Conformity Pressure: The desire to fit in and be accepted by others creates pressure to follow the crowd.
Information Cascades: When people make decisions based on the actions of others rather than their own information, it can create cascades where everyone makes the same decision regardless of their private information.
Availability Heuristic: People judge the likelihood of success based on how easily they can recall examples of others who succeeded.
Overconfidence Bias: Success in following the crowd can lead to overconfidence in one’s ability to spot trends and make good decisions.
The Institutional Defenses
Effective institutions develop defenses against bandwagon effects:
Devil’s Advocate Processes: Organizations can formally assign people to argue against popular decisions to ensure alternative viewpoints are considered.
Independent Analysis: Requiring independent analysis rather than relying on what competitors are doing.
Diverse Perspectives: Including people with different backgrounds and viewpoints in decision-making processes.
Historical Perspective: Studying past examples of bandwagon effects and their consequences.
Contrarian Thinking: Rewarding people who question popular assumptions and think independently.
The Individual Defense Strategies
Individuals can develop strategies to resist bandwagon effects:
Independent Research: Doing your own analysis rather than relying on what others are saying or doing.
Contrarian Questioning: Asking why everyone might be wrong rather than assuming they’re right.
Historical Analysis: Studying past examples of popular decisions that turned out badly.
Risk Assessment: Carefully evaluating the potential consequences of following the crowd.
Delayed Decision-Making: Taking time to think independently before making decisions, especially when everyone else seems to be rushing.
The Wisdom of Crowds vs. The Madness of Crowds
It’s important to distinguish between the wisdom of crowds and the madness of crowds:
Wisdom of Crowds: When people make independent decisions based on different information, the aggregate outcome can be very accurate.
Madness of Crowds: When people make decisions based on what others are doing rather than independent analysis, the aggregate outcome can be wildly inaccurate.
The key difference is independence. The wisdom of crowds requires that people make decisions independently, while the madness of crowds occurs when people follow each other.
The Modern Relevance
The 1929 crash remains relevant because the underlying psychology of bandwagon effects hasn’t changed. People still want to follow the crowd, still fear missing out, and still use social proof as a shortcut for decision-making.
What has changed is the speed and scale of modern bandwagon effects. Social media and digital communication allow bandwagon effects to spread faster and reach more people than ever before. The consequences can be more severe because more people can be affected more quickly.
The lesson of 1929 is not that we should never follow popular trends or that crowds are always wrong. The lesson is that we should think independently, do our own analysis, and be especially skeptical when everyone seems to be doing the same thing.
The Continuing Challenge
The bandwagon fallacy continues to challenge our decision-making because it exploits fundamental aspects of human psychology. We are social creatures who naturally look to others for guidance, especially in uncertain situations. This social nature served us well in small groups throughout most of human history, but it can lead us astray in modern mass society.
The challenge is to maintain our social connections and learn from others while preserving our ability to think independently and critically. We need to be part of the community without being slaves to the crowd.
The Ultimate Lesson
The 1929 crash teaches us that the bandwagon fallacy is not just an intellectual error—it’s a dangerous form of collective delusion that can have devastating real-world consequences. When everyone jumps on the bandwagon, the bandwagon can collapse under the weight.
The people who lost everything in 1929 were not fools or gamblers—they were ordinary people who made the reasonable-seeming decision to follow the crowd. Their tragedy reminds us that popular decisions are not necessarily correct decisions, and that sometimes the safest place to be is away from the crowd, even when the crowd seems to be having all the fun.
The lesson is not that we should be contrarians for the sake of being contrarian, but that we should think independently, do our own analysis, and be especially careful when everyone seems to be doing the same thing. The bandwagon can be a powerful force for good when it’s heading in the right direction, but it can be equally powerful force for destruction when it’s heading toward a cliff.
In our interconnected world, where information spreads instantly and social pressure can be overwhelming, the ability to resist bandwagon effects is more important than ever. The 1929 crash reminds us that when everyone’s wrong together, the consequences can be catastrophic for everyone involved.