“Thus it might be that one family camped near a spring, and another camped for the spring and for company, and a third because two families had pioneered the place and found it good. And when the sun went down, perhaps twenty families and twenty cars were there.”
This quote from John Steinbeck’s classic the Grapes of Wrath paints a powerful reality about human nature. It depicts humans as the social animals that we are.
In times of uncertainty, people are afraid, and when we’re afraid, we rely upon the herd to guide us.
Sure, the crowd’s guidance can be a useful crutch to lean upon, but what happens when we use it too often–when we’re just lazy?
The concept we’re teasing out here is known as: herding behavior and we can define it as: people doing what others do, instead of using their own information to make decisions.
This happens often. We see a large number of people acting in the same way, and we think “there’s no way that they could all be wrong. They must know something that we don’t.”
We start to base our decisions off of the assumption that everyone else has done their research or knows something that we don’t. But, that’s not always the case.
Consider the following example offered by Robert Shiller, an economist at Yale:
Suppose two restaurants open next door to each other–Restaurant A and Restaurant B.
Every new customer must choose between the two.
The very first customer sees two empty restaurants and must choose which one to eat at based only on their appearance. Let’s say she chooses restaurant A.
The second customer sees one person eating at restaurant A and an empty restaurant B. She makes her choice based on two things:
- The appearance of each restaurant (her own information) and
- The fact that the first customer chose restaurant A (information from others)
If the second customer chooses to go to Restaurant A, the third customer will see two people eating at Restaurant A.
I think you see where this is going.
As people continue to join the crowd, they prompt others to do the same. Eventually, all customers may end up at Restaurant A, which could actually be the poorer restaurant.
What’s happened is: People have ignored their own information and that creates a distorted signal chain. We think that everyone has made an informed decision, and that decision appears to have value. But in reality, everyone has based their decisions on the decisions made by others, and because of this, our decisions contain no real valuable information.
These chains of behavior are sometimes called informational cascades, and they help us explain everything from standard conformity to fads and booms and crashes.
Speaking of booms and crashes. You might remember the financial crisis of 2008. While an event as cataclysmic and complex as that cannot be explained with one behavioral failure, research suggests that herding behavior may have played a role in decision making by investment managers.
Investors concerned with their reputation have been shown to mimic the investment decisions of other managers, ignoring their own private information.
It’s worth returning to the idea that, In times of uncertainty, people are afraid, and when we’re afraid, we rely upon the herd to guide us.
As the financial world collapsed in 2008 and uncertainty loomed above us all, there’s no question that our herd mentality must have played a role in our decision making.
Whether or not we’re aware of it, our reliance upon the herd plants the seeds which will influence the stores we shop at, the restaurants we try out, and even the universities we choose to attend.
The solution is not to avoid all external information. Rather, the idea is to become more aware of the information we’re using to make decisions, especially when we’re observing what other people are doing.
The herd is not synonymous with bad; however, our over reliance upon the herd prompts ignorance and distorts the information we use to make decisions.