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Herd Behaviour

Herd Behaviour. A brief introduction. By Otto Han 10300680011. Prologue. Herd behaviour is everywhere Go down the street in search of a place to eat See many people line up in front of restaurant A Join in the line → rational Overly crowded and slow in service.

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Herd Behaviour

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  1. Herd Behaviour A brief introduction By Otto Han 10300680011

  2. Prologue • Herd behaviour is everywhere • Go down the street in search of a place to eat • See many people line up in front of restaurant A • Join in the line→rational • Overly crowded and slow in service Irrational behaviour and an unfair result

  3. Definition Herd behavior is the widespread tendency to behave like most other people, with the will to fit social norms outweighing the will to make independent analysis of the situation. Those who particpate in herd behaviour are called “herds”.

  4. Features • 1. Imitationbased on a prevailing “good reason” • There should be ample acceptable reasons, whether stated or not, that motivate imitators to behave in the same way. • 2. Inadequate information • If participants had enough information to make a sensible choice, they would probably not follow others’ doings.

  5. Features 3. Unbalanced supply and demand An increasing supply usually coincides with an exploding demand.

  6. Possible causes • 1.Information cascade • Seeing many people making the same choice provides the evidence that outweighs one's own judgement. • Case: Rumour repeated turns truth.

  7. Possible causes • 2. Cultural influence • Some culture appreciates crowd wisdom and collective decision-making, thus nourishing the “follower attitude”. Case: Crazy Chinese Shoppers in the post-Christmas rush Crowds at the Selfridges, Dec 26th

  8. Possible causes • 3. Obedience to authority • The “authority effect” prevails, first, because of the "security mentality"—that following the “correct model” will reduce the probability of making mistakes; second, due to the "praise effect"—that the opinions coherent with those of the authorities are more easily accepted and understood. • Case: • Stock Analysts

  9. Summary • Threefeatures: • ① “for good reasons” • ② “inadequate information” • ③“unbalanced demand and supply” • Three possible causes: • ① “information cascade” • ② “cultural influence” • ③ “obedience to authority”

  10. Remedies • Transform the collectivism way of thinking • Collect more information • Make objective analysis • Honor your commitment

  11. Reference • Bikhchandani, Sushil, David Hirschleifer, and Ivo Welsh. 1992. A Theory of Fads, Fashions, Custom, and Cultural Change as Information Cascades. Journal of Political Economy 100: 992–1026. • Bikhchandani, Sushil, and Sunil Sharma. 2001. Herd Behavior in Financial Markets. IMF Staff Papers 47 (3): 279–310. • Jain, Arvind K., and Satyadev Gupta. 1987. Some Evidence on ‘Herding’ Behavior by U.S. Banks. Journal of Money, Credit, and Banking 19 (1): 78–89.

  12. Q & A...... Thank you!

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