The Business Book

146146

S W I M U P S T R E A M.

G O T H E O T H E R W A Y.

I G N O R E T H E

C O N V E N T I O N A L

W I S D O M

IGNORING THE HERD

T

he herd instinct is clear in

nature and just as clear in

business. Most people feel

more comfortable following what

others are doing than standing out

as a “loner” or maverick. Ignoring

the herd takes great psychological

strength. When stock markets rise

steeply, new—perhaps first-time—

investors get sucked in by the

apparently easy pickings. These

latecomers to a booming “bull

market” cause share prices to propel

upward for a last time before they

slump back toward their previous

value. By following the herd in this

way, most first timers invest when

share prices are near the top and

usually sell when they find that their

IN CONTEXT

FOCUS

Business behavior

KEY DATES

1841 Scottish journalist

Charles MacKay documents

herd behavior in his book,

Extraordinary Popular

Delusions and the Madness

of Crowds.

1992 Indian economist Abhijit

V. Banerjee publishes A Simple

Model of Herd Behaviour.

1995 In “Herd Behaviour,

Bubbles and Crashes,” German

professor Thomas Lux claims

prices and sentiment affect

one another, so feelings of the

herd affect prices (for example,

faith in the housing market

pushes up prices).

2001–06 The housing bubble

in the US and parts of Europe

gathers pace before collapsing

in the 2007–08 financial crisis.