Academics and the media often use the term “herding” differently than socionomists do. Here are some distinctions.
Socionomic Perspective: 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 were unsure 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 resources.
Non-Socionomic Alternative Perspective: Some academics and media writers view herding as rational and conscious. This is the exact opposite of how socionomists 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 socionomists recognize that this phenomenon may occur, we would not refer to it as “herding,” nor do we think it is a useful way of describing financial markets.
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, our perspective is that the people are simply rationally maximizing the utility of their resources. Socionomists only recognize herding when the behavior is non-rational and performed in the context of uncertainty.