Behavioral finance FAQ / Glossary (Herding)
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Herd instinct, behavior, mentality,
A Behavioral Finance classic
seen in many messages + see also
collective biases, crowd behavior,
(rational) expectations, cascades,
trend following, consensus, laziness,
groupthink, contagion, conformity,
epidemic, peer pressure + bfdef2
The more, the merrier, certainly!
The more, the stronger, maybe !
The more, the wiser, maybe not!
Hearts beat together,
Minds think together,
Mouths sing together,
Feet walk together,
People ...trip and fall together.
To make it simple,
Herding (or flocking, swarming..) / herd instinct /
herd behavior /herd mentality - when applied to
human beings - describes how, from time to time, nearly
everybody thinks, decides, acts in the
same way, as a single entity.
More academically, herding is a social psychology allegory (*).
It is an extension of aping / mimicry to a whole crowd
Herding describes a contagious
* and reflexive
phenomenon that is rather common among large
A related phenomenon is peer conformity (see those words)
(*) Aristotle, and later St Tomas de Aquino, was the first to call the
human being a "social animal".
An ambiguous compliment!
Such a collective phenomenon happens when a group or a mass (for example
the bulk of investors) adopts, as if it were a single body (herd) and
without clear rational (*) motive:
A common - positive or negative - attitude,
And - here the effects becomes crucial - a common
behavior, sometimes highly irrational
(*) Of course, to think that other people have more experience and knowledge
than us in some areas and cases, and that to choose do in Rome like the
* is sometimes wise (see the "individual effects" section),
* but on condition to be ready to analyze further if those people are
not enslaved by habits and mimicries.
How does herding start?
Instinct only? Or some shepherd's act involved?
Herding can be either spontaneous or manipulated:
1) Spontaneous, in an either instantaneous or gradual way:
It might surge under the collective emotion due to an
extreme social shock,
Or it can spread among people progressively.
A common perception of some situation builds strength.
All the more if it is buttressed by a cold analysis done in
But usually it is associated with a growing collective feeling,
such as enthusiasm or discontent, or good old "fear and
hope", or whatever positive or negative common sentiment
2) Or "helped" by people who know they can play on that
potential instinct and find advantage in manipulating it.
All along History, cult gurus populist politicians
or ideological factions have found ways to
manipulate human groups, masses
or crowds into herds.
This domineering influence blocks everybody's mind towards
only one direction, often with disastrous consequences.
The herding instinct: possible genetic origins
Feeling warm, comfortable and safe
against big bad wolves?
Emotions and cognitions don't seem to be the only factors that lead to
Old genetic instincts seem involved too.
The herd instinct combines beliefs and behavioral reflexes.
It might come from the old "animal brain" anchored on the "predator-
prey" (wolves and sheep) phenomenon.
Grouping and moving together was a strategy by some "prey"
species to protect from predators, which hesitated to attack a
mass of of individuals.
Predators, on their side, might have found an advantage in
attacking as a pack. Save the predators?
More generally, social cohesion, solidarity, cooperation or organization
suppose some common feelings (see affect heuristic, empathy,
Groups are emerging / self organizing bodies that are consistent with the
usual evolution of dynamical systems (see that word).
On the other hand, this tendency to stick together can also create distrust
and hostility between several groups and populations.
Whence comes a feeling of safety, comfort and
well being in behaving in harmony with the group,
in the warm proximity of other human beings.
There is some affect heuristic here (see that phrase)
There is also some fear added, as it seems to
work in two ways:
Avoiding to feel alone might compensate the anguish due to
the uncertainty aversion.
The fear to be crushed by the group (see "peer pressure") if
a member dissents seems also to favor herding.
Herding is therefore not only a collective cognitive phenomenon (like
information cascade, or social learning), but quite often also an emotional
expression of collective hope/greed and fear.
The individual effects
It makes you wise? Or foolish?
"In Rome, do like the Romans" is sometimes an appropriate reaction.
Better admit that the Romans knew what were the wise things to do
But in other circumstances, or when it gets excessive and purely
emotional, such a conformity might override individual
reasoning and behavioral inhibitions.
Here the group paralyzes individual thinkingand takes the driver seat like an autopilot.
This not only can cause collective erroneous behaviors but also it
makes the individual act unconsciously against its real interest, goals
Herding in economic
and financial markets
Herding towards money pastures, or to fall over
In economic and financial markets, it is common
that most investors share similar expectations
at thesame time on future prices and returns.
For example, in stock markets, there are periods when nearly all investors
(even professional ones) become short term players and
1) bullish (= thinking that prices will rise)
2) bearish (thinking they will fall).
In case 1) buyers become ready to buy at any price and sellers
to sell only at a higher price
In case 2) sellers become ready to sell at any price and buyers
to buy only at a lower price.
=> As market prices result from buyers meeting sellers in the same
racing field, that combination pushes prices up in case 1) and
down in case 2).
When those attitudes self-feed for too long, the related market trends
can degenerate into bubbles and crashes.
This collective bias contradicts in some respect
at least three standard economic theories:
The idea that every economic agents is independent of the other
ones in taking its decisions.
The law of supply and demand according to which higher prices
are supposed to attract more sellers and deter buyers (*).
The idea that asset prices give pure information about
Actually, prices give a mix of information, not easy to untangle,
as well about hard facts as about the crowd's mood.
(*) At least in financial asset markets (stocks...).
In commodity markets the law of supply and demand works
Herding, and the related price momentum exist but they have a
shorter life: after a while price rises attract less demand and price
falls more demand.
Herding can come in various flavors,
some of them near-rational
What makes us imitators?
A cool sense of interest? Or just laziness?
Or the magnetic attraction of some
collective good or bad feeling?
Sometimes, herding obeys an apparent rationality , as
the Roman allegory seen above tells.
The idea is "as the others do it, they must have a reason"
here is what is called "rational herding", "rational expectations",
or"information cascades" (see those phrases) and also the
"beauty contest" allegory.
But such sequences of rational imitations that spread from
people to people could also be called "perverse rationality"
if obviously excessive
Herding by neglect.
Herding could also be due to pure laziness :
to follow the trend spares further information research and analysis.
Well, this "time saving and effort saving bias" can also be seen
as a kind of raw rationality.
But quite often herding is an emotional
contagion (crowd / mass behavior).
In such cases, emotions (like greed, hope or fear) take control.
A massive and persistent herding is typically emotional and
can get more and more so.
This differs from a simple information cascade, which is more
fragile, as based more on - a reversible - thinking or reflex and
less on pervasive feelings.
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1) click "messages", 2) enter your query in "search archives".
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