Why Do I Panic Sell When Everyone Else Does?
Why Do I Panic Sell When Everyone Else Does?
A quick note before we get into it: this post is about the psychology behind investing decisions, not financial advice. Nothing here should be read as a recommendation to buy, sell, or hold anything.
Years ago, I believed in a company that was about to go public. I did my research, found an underwriting bank I had a relationship with, and asked my rep if she could get me shares in the IPO. She told me the most she might be able to get me was 100 shares, but the odds weren’t good, demand was that high.
The day of the IPO, I never heard from her. I wasn’t one of her big clients, just a small fish, so I figured that settled it, I got nothing. No big deal. I moved on.
FOMO (Fear of Missing Out): Getting In With Everyone Else
That same day, I bought shares on the open market as it opened and climbed. I got in around 90, right there with everyone else buying.
Then it turned. People started cashing out, the price came down hard and fast, and you could see the panic in how quickly it was dropping. I sold at 85.
The stock closed that day at 69. It had opened trading around 80, after an IPO price of about 16.
The Statement That Changed the Story
About a month later, my bank statement showed something I didn’t expect. I actually had gotten 100 shares in the IPO after all, I just never found out.
I looked up the current price. It was around 160.
That one statement taught me two things at once. First, I sold at 85 because everyone around me was selling, not because anything about the company’s actual data had changed. Second, the only reason I still owned those 100 shares was that I didn’t know I had them. If I had known, I’m fairly certain I would have sold those too, at the exact same panicked price, for the exact same reason.
Herd Mentality: Why the Crowd Feels Safer Than the Data
Here’s what I understand now. Rising feels safe because everyone’s getting in. Falling feels dangerous because everyone’s jumping out. That’s herd mentality, your safety system reading the room and mistaking motion for meaning.
It’s not actually pricing the stock. It’s pricing how alone you’d feel if you turned out to be wrong by yourself.
There’s a name for part of what was happening in that panic too: loss aversion. Daniel Kahneman and Amos Tversky’s landmark research (Kahneman & Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, 1979) found that losses hurt roughly twice as much, psychologically, as an equivalent gain feels good. That’s likely part of why the crowd sold so fast once the price turned, watching a gain shrink hits harder and faster than the pleasure of watching it grow ever did.
Test It Before You Trust It
This is exactly what the T in STOP is for, a technique I’ve written about elsewhere in this series. Test—is it fear or wisdom? Fear says everyone’s buying, you’ll miss out if you don’t get in now, the feeling so common it has its own name, FOMO. Fear also says everyone’s selling, get out now before it’s too late. Wisdom says look at what’s actually true about the company, not what everyone else is feeling in the moment.
Your safety system doesn’t know the difference between the two on its own. That part is your job.
Take the Lead Challenge
Next time you feel that pull, the urge to buy because everyone’s buying, or sell because everyone’s selling, run the test before you act. Is this fear, or is this wisdom? One is based on facts. The other is based on how the crowd is feeling right now.
F. Allen Scott is the author of From Safety to Success, where he explores the safety system framework behind why we stay stuck, and how to finally change that.
Related reading: Why Fear of Failure Sounds Like Wisdom (It Cost Me 5x)