HERDING

HERD BEHAVIOUR IN FINANCE

Presentation by:
Shreya Mahana 21020942064
Arpita Agrawal 21020942027
Saurav Singh 21020942063
Sasha Sharma 21020942035
Abhishek Athavale 21020942084
INTRODUCTION-
● Heard Behaviour is everywhere
● Whether you go down the street in search of a place to eat or you decide to
invest your disposable income you will always see people lined up one after
the other to buy/sell the same thing as everyone else is doing.
● It starts with a rational behaviour of a person to take a step towards an
initiative but ends with irrational behaviour once they start to follow the
herd.
● Herd behaviour often ends up with unfair results .
 DEFINITION -
Herd behaviour is the widespread tendency to behave like most other people,
with the will to fit social norms outweighing the will to make independent
analysis of the situation .
“Those who participate in herd behaviour are called herds”
 FEATURES
● IMITATION BASED ON A PREVAILING “GOOD REASON”-

THERE SHOULD BE AMPLE ACCEPTABLE REASONS WHETHER STATED OR NOT , THAT

MOTIVATES THE IMITATORS TO BEHAVE IN THE SAME WAY
● INADEQUATE INFORMATION-

IF PARTICIPANTS HAVE ENOUGH INFORMATION TO MAKE A SENSIBLE CHOICE THEY WOULD

PROBABLY NOT FOLLOW OTHERS DOINGS
● UNBALANCED SUPPLY AND DEMAND-

AN INCREASE IN SUPPLY USUALLY COINCIDES WITH AN EXPLODING DEMAND

 HERD MENTALITY IN FINANCE

DOT COM BUBBLE

● 1990s
● Irrational Investments by the Investors
● Suspected by Wall Street
● Burst of bubble
GENERAL CAUSES OF HERDING-
❏ INFORMATION CASCADE

Seeing many people making the same choice provides us the evidence that somehow outweighs one’s own
judgement as we say that rumour repeated turns truth.

❏ CULTURAL INFLUENCE

Some culture appreciates crowd wisdom and collective decision-making, thus nourishing the “follower
attitude” as crazy chinese shoppers in the post-christmas rush.

❏ OBEDIENCE TO AUTHORITY

The authority effect prevails among general public especially because of the security mentality as people
think that then there will be less probability of making mistakes and the opinions of these authorities are
easily accepted and understood as in case of stock analysts.
Examples

1.Choosing items off a menu in a restaurant when part of a group.

2.Voting, demonstrations, riots, general strikes, sporting events, religious gatherings,
everyday decision-making, judgement and opinion-forming.
3.Suppose that a family is walking down the street looking for a restaurant to have
dinner. If they pass a restaurant that is empty and one that is relatively crowded with
people, they are far more likely to choose the crowded one, on the assumption that
it's better because there are more people there.
4.In case of investments, people often don't go with fundamental/technical analysis.
Rather they blindly buy or sell according to what their peers/friends are doing.
 Ways To Avoid Herding
1. Stop Being on Auto-Pilot

When we don’t stop and take the time to consider our options, we go
through the motions as if we’re on auto-pilot. Instead of conducting our
own research, we’ll look around at what others are doing and simply
copy what we see. Once you’re aware of the natural tendency to go with
the “social default,” you can begin making more conscious decisions for
yourself.
2. Make a Conscious Effort to Form
Your Own Opinion
Rather than simply saying, “I’ll have what he’s
having,” develop your own opinion.
Researchers discovered that when people
knew they would need to justify their choices,
they were much less likely to blindly mimic
other people. Rather than adopt the herd
mentality, educate yourself about your choices
so you can make a well-informed decision.
3. Take Time to Make Decisions
Participants in the study were more likely to
copy other people when they felt pressure to
hurry. Take time to make decisions by asking
questions and thinking about your options –
even if that means you risk looking “stupid” or
holding up the line. Just because everyone
else seems to be making a quick decision
doesn’t mean they know best.
4. Be Aware of Ways in Which Stress
Affects Your Decision Making
When participants were thinking about
something else – such as numbers they were
asked to memorize – they were much more
likely to mimic other people. If you’re stressed
about something going on in your personal
life, or you’re distracted by something another
problem that’s weighing on your mind, you’re
at greater risk of being a copycat. Recognize
that risk, and when possible, put off decision
making until you can concentrate on the task
at hand.
5. Be Willing to Stand Out
The study shows that we’re more likely to copy
other people when we lack social acceptance. In
an attempt to fit in with the crowd, we go along
with the consensus. But,
successful people don’t make it to the front of the
pack by sticking with the crowd
. Instead, they strive to stand out and dare to do
things differently.
Don’t allow anyone else to tell you what you
should think, feel, or do. Instead, be conscious of
how other people are likely to influence your
choices. Take time to evaluate whether or not the
choices you’re making are really your choices.
Remember,
it's better to be known as a lone wolf than a copyc
at