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Herding Impulse

Academics and the media often discuss herding differently than socionomists do. Here are some distinctions.

Our Take: When do people herd? They herd when they are uncertain. In contexts of uncertainty, the herding impulse drives social behavior. There is an evolutionary advantage to this. If you weren’t sure if there was any danger around, but all of your friends started running, your chances of survival increased if you, likewise, joined in—otherwise you might be the only one the lion sees. However, there are devastating consequences to this in finance, namely losses. You’ll buy tops and sell bottoms. The herding impulse is based in the amygdala, a part of the brain’s limbic system. It is non-rational, unconscious, endogenously-regulated and impulsive. By “non-rational” we mean that the herding impulse is not based on reason, but is not necessarily “irrational.” As demonstrated in the lion example, there are instances where running with the flock is sensible.

People always herd in financial markets, but not economic markets. In economic markets, people use their rational capabilities to maximize the utility of their dollars.

Example of herding, as we use the term: During a bear market, people flock to see the latest horror movie.

Academic Take: Since the nature of human herding is the subject of much debate in academia, there is an alternative point of view. Some academics and media writers view herding as rational and conscious. This is the exact opposite of how we theorize it. There’s a significant literature on “Bayesian updating,” which theorizes that sometimes people consciously and rationally ignore their private information and follow the group. While we recognize that this phenomenon may occur (see example below), we would not refer to it as “herding,” nor do we think it is a useful way of describing financial markets.

Example of “rational herding,” as some academics and media pundits use the term:

There’s a new movie out, Blood and Guts 3: Thrice Bitten, Not Shy. I heard the movie is lousy and not nearly as good as another new movie, Chainsaw 77: Dismemberment Plan. But, I’m with a group of five other folks, and they’ve all heard that Blood and Guts 3 is the superior film. So, with this new information, I decide to go along with the group and see Blood and Guts.

This brings us to an important distinction. According to socionomic theory, not all synchronized group action is herding behavior. While some academics look at the phenomena of people going to the mall when there’s a sale, for example, as herd behavior, we say that this is simply an example of people rationally maximizing the utility of their dollars. We only recognize herding when the behavior is non-rational and performed in the context of uncertainty.

Move forwardContinue to see some examples of a socionomist views causality

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