Behavioral finance FAQ / Glossary (Crowd)
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,
00/8d,9i,11i,12i - 01/3i -
02/3i,4i,5i,9i - 03/03i -
04/4i - 06/11i + see
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?
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
But in the meantime cool
wisdom is not always here.
There are fairly long periods
when pure social
tend to supersede wisdom.
When crowd behavior
becomes extreme behavior
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
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.
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
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