Herding Behavior: How Following The Crowd Leads Us Astray

Thus, it might be that one family camped near a spring and another camped for the spring and for company. And a third because two families had pioneered the place and found it good. And when the Sun went down, perhaps 20 families and 20 cars were there. This quote, from John, Steinbeck's, classic The, Grapes of Wrath paints a powerful reality about human nature. It depicts humans as the social animals that we are reminding us that in times of uncertainty. People are afraid. And when we're afraid we rely on.

Upon the herd to guide us, sure the crowds' guidance can be a useful crutch to lean upon. But what happens when we use it too often when we're just lazy, the concept we're teasing out here is known as herding behavior. And we can define it as people doing what others do instead of using their own information to make decisions.

This happens. Typically we see many people acting in the same way. And we think there is no way that they could all be wrong. They must know something that we don't. We. Start to base our decisions off of the assumption that everyone else has done their research or knows something that we don't know, but that's, not always the case. Consider the following example, offered by Robert Schiller, an economist at Yale.

Suppose two restaurants open next door to each other restaurant, a and restaurant be the very first customer sees two empty restaurants and must choose which one to eat at based only on their appearance let's say, she chooses restaurant a second customer. Sees one person eating at restaurant a and an empty restaurant B. She makes her choice based on two things. First, the appearance of each restaurant, that's her own information.

And secondly, the fact that the first customer decided restaurant, a that's external information. If the second customer decides to go to restaurant a then the third customer will see two people eating at restaurant a and an empty restaurant, B I. Think you see where this is going as people continue to join the crowd. They prompt.

Others to do the same eventually, each customer might end up at restaurant, a which could actually be the poorer restaurant. What's happened is people have ignored their own information. And that creates a distorted signal chain.

We think that everyone has made an informed decision, and that decision appears to have value. But in reality, everyone has based their decisions on the decisions made by others. And because of this, our decision contains no real valuable information.

These chains of behavior are. Sometimes called informational Cascades, and they help us explain everything from standard conformity to fads and booms and crashes speaking of booms and crashes. You might remember the financial crisis of 2008 while an event as cataclysmic and complex as that cannot be explained by one behavioral failure. Research suggests that hurting behavior may have played a role in decision-making by investment managers investors concerned with their own reputation have shown to mimic the investment decisions. Of other managers ignoring their own private information it's worth returning to the idea that in times of uncertainty, people are afraid.

And when we're afraid we rely upon the herd to guide us as the financial world collapsed in 2008 and uncertainty loomed above us, all there's, no question that our herd mentality kicked in, and it probably played a role in our decision-making, whether we're aware of it. Our reliance upon the herd plants, the seeds, which will influence the stores. We shop at the. Restaurants we try out and even the universities we choose to attend the solution is not to avoid all external information.

Rather the idea is to become more aware of the information we're using to make decisions, especially when we're observing what other people are doing. The herd is not synonymous with bad. However, our over-reliance on the herd, prompts ignorance and distorts the information we use to make decisions.