And then there are jokes that more solitary animals, such as cats, cannot be herded. We tend to think of ourselves as very independent-minded, in that cool and carefree group with felines, but we are actually more like cattle than cats when it comes to herding. (Alfred Hitchcock was a master at documenting the phenomenon in many of his classic films. Watch for his crowd, theater and symphony scenes.)
Numerous studies about human herding come across my desk. Here is information about one of the latest, from the University of Gothenburg:
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- It is therefore
important to understand which psychological mechanisms induce people to
behave in the same way as everyone else, says Maria Andersson, who has
studied why herding occurs in her doctoral thesis in psychology.
(Early photo of the floor of the New York Stock Exchange; Credit: National Park Service)
The stock market contains various kinds of information that can provide guidance as to the future yield of shares. An important question is which information and analyses investors use when they make investment decisions.
- A common strategy is to observe what others do and follow the herd, says Maria Andersson.
Influenced by a herd
The thesis presents four experimental studies that illustrate herding in the stock market. Some 450 people took part in the investigations. The primary aim was to establish whether investors are influenced by a herd when they make investment decisions, and if that is the case whether it matters if the herd constitutes a majority or a minority. The size of the herd and the reliability of its judgements varied in the different studies.
In brief, the results show that there is a strong tendency to put trust in the majority being right and to disregard minorities. This result applies irrespective of whether the majority has performed well or not. Minorities on the other hand have no influence even if their point of view is correct.
Is there any way to avoid being drawn along with the herd?
The studies demonstrate ways of breaking the influence of the majority by getting the participants in the trials to use more premeditated thinking.
- This can be achieved by raising the participants’ awareness of how reliable the information is, says Maria Andersson.
Better and clearer information would probably also increase the chance of investors disregarding the herd. Being aware that the information available concerning the stock exchange is not always reliable and critically examining what the herd is doing is consequently a good starting point for successful share dealing.>>
Tags: Animals
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