Behavioral finance FAQ / Glossary (Herding)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental 

Herd instinct, behavior, mentality,


A Behavioral Finance classic
seen in many messages + see also
collective biases, crowd behavior,
(rational) expectations,
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
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

  * emotional,
  * cognitive
  * and reflexive
phenomenon that is rather common
among large
human groups

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
clear rational (*) motive:

A common - positive or negative - attitude,

And - here the effects becomes crucial - a common 

behavior, sometimes  highly irrational
and excessive.

(*) 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
      Romans do:
      * 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
or whatever positive or negative common sentiment
or mood.

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
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,
 genetic utility
 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
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
in Rome.

But in other circumstances, or when it gets excessive and purely

emotional, such a conformity might override individual
and behavioral inhibitions.

Here the group paralyzes individual thinking

             and 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
and values.

Herding in economic
     and financial markets

Herding towards money pastures, or to fall over
the cliff.

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?

Rational herding.

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.

Emotional herding.
     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.

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

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This page last update: 27/07/15  

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