Behavioral finance FAQ / Glossary (Crowd)

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This is a separate page of the C section of the Glossary

 

Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidenta

Crowd behavior



00/8d,9i,11i,12i - 01/3i -
02/3i,4i,5i,9i - 03/03i -
04/4i - 06/11i + see
herding, groupthink,
mimicry, hysteria + bfdef2

Do crowds feed individual brains,
or do they eat them?

The idea between the crowd behavior / mob psychology notion is that

People tend to think, feel and behave differently
in a crowd
than they would do individually and
as a result to act as a single entity.

Now what are the positive / negative effects?

The so-called
"wisdom

of crowds"
tends to
operate in the long run

(that is why markets, and
more generally the human
civilization, survive, with a
balance tilted towards
positive outcomes).

But in the meantime cool
wisdom is not always here.

There are fairly long periods
when pure social
mimicry and
collective emotions,
often
irrational,
tend to supersede wisdom.

When crowd behavior
     becomes extreme behavior

Getting wild.

In a crowd, whether physical or disseminated (masses),
individuals might lose:

their inner inhibitions, thanks to a sense of power

and anonymity that dilutes personal responsibility

also their personal thinking (in unison with the crowd),

=> This makes them follow the collective behavior

Therefore, sometimes their actions go to harmful extremes.

In such cases of "collective hysteria", crowd emotions tend

* Not only to reinforce individual irrationalities,

* But also to replace individual rationality by regressive /

   animalistic / visceral / primitive / simplistic
   collective reactions
.

   Good bye, finesse, just goose step !

Then, individuals tend to behave as a single entity in an excessive
     
and damaging way (panic, aggression, or worse...).

The article on "herding", a related phenomenon, gives more details.

Investor crowds

Queuing at the market entrance or exit

In asset markets, there are times when the bulk of investors / traders
tend to
act as an irrational crowd expressing a collective greed or
fear
, as if nobody would want to "miss the party".

The results on prices and returns can be:

Either minor trends (return clusters) or price clusters,

caused by occasional fads, fashions
(or, conversely, apathies),

Or, when those herd emotions become exacerbated

in dramatic over- / underpricing, the famous bubbles
and crashes
.

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

Members of the BF Group, please
 vote on the glossary quality at
BF polls

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This page last update: 11/09/15
 
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