Introduction
Herd behavior is a very common phenomenon which we can observe in the financial market, fashion trends and during crisis situations. This behavior reflects the complexities of human behavior and indicates how an individual navigates during collective influence.
Herd behavior refers to the tendency of individuals to follow and imitate the decisions, actions and behaviors of a larger group, without considering the individual rational judgment.
Importance of Herd Behavior
This concept is necessary to understand several aspects of human behavior and their approach to decision making and other societal parameters. Some of the importance of understanding such behavior are:
- Understanding the mass behavior can help in mitigating risk of potential bubbles or threat created by the herd. Stock market bubbles, housing market bubbles, panics in the market, crypto booms, oversubscriptions etc. are the result of herd instinct. We can underplay such risky dynamics of the market.
- Herd behavior is visual and evident. Investors and individuals can make effective investment decisions by understanding the underlying reason for herd behavior. It assists investors and individuals in understanding the market trends and valuations and preventing speculative bubbles.
- This behavior is important during marketing and advertisements. Businesses can utilize such behavior for positioning their marketing campaign. Viral trends reflect the behavior of the individuals and their interests. Marketing companies and businesses can use such information to target or position their strategies.
- Herd instinct can play a crucial role in a social revolution. Herd behavior can induce a social movement and can vouch for a positive change in the society if all the factors are channelized properly.
- Herding behavior is important for regulators as well. Regulators and management can consider the dynamics of herd behavior during a crisis. Response management, impact planning, and crisis management can be effectively mobilized with the inputs from the crisis management.
Examples of Herd Behavior
Such mass behavior is all over the market place. We can see people forgetting their rational behavior and following mass mobility. Some of the examples of herding behavior are:
| Dot-Com Bubble | Housing Bubble | Panic Sellings | IPO oversubscriptions |
| Cryptocurrency Hype | Startup Hype | Viral Challenges | Online Reviews |
| Crazy Sales and Deals | Fitness Trends | Hashtag Trends | Protests & Demonstration |
| Consumer Electronics | Health Panic | Movie Premiers | Fashion Trends |
Characteristics of Herd Behavior
| Conformity | When everybody is buying Stock A, individual investors also buy stock A. Herd confirms the judgment that purchasing Stock A will serve your investment objectives. |
| Fear and Panic | Panic selling in the stock market reflects the fear in the investors. This panic selling is due to herd behavior. |
| Short term Focus | Herding focuses on the short term gains. Majority of the investors investing in skyrocketing stocks for a quick gain has a short term gain motive. |
| Excessive Volatility | The price movement is highly volatile due to herd behavior. The aggressive price movement of bitcoin and dogecoin due to break out of the news. |
| Amplification | Herd behavior amplifies the more adopted behavior. The Bank-Run situation is a result of herd behavior. |
| Irrational Exuberance | This means excessive hope and optimism towards something which all are following. For instance, during the dot-com bubble, the majority of the investors invested on the internet and related companies. |
| Bandwagon Effect | People follow the herd to avoid the fear of missing out on something others find valuable. The finance, stock market, mutual funds tips trending in social media. |
| Uncertainty | Herding behavior leads individuals and markets to behave in a random way where the majority of individuals are behaving. Such random behavior is uncertain and is for the short term. |
| Information Cascading | Herd is better informed and has superior knowledge. This lead to more individual following the herd. |
| Risk Mitigation | Herding can help in identifying and assessing the risk at an early stage. Herding stands out and helps aware individuals to take decisions in favor or against the herding. |
