Tuesday, May 10, 2011

Herd Mentality

Another prevalent decision making error, which goes by many names, is herd mentality. Herd mentality describes how people are influenced by their peers to adopt certain behaviors, opinions, trends, ideas, etc. There are thought to be many reasons why we as individuals may partake in herd mentality but the major influences are social acceptance, safety concerns, to avoid conflict (groupthink) and to avoid formal decision making (information cascade - if everyone is doing it, it must be ok).

The most common example I can think of is fashion. Every year new fashionable clothes come out and are adopted by a few celebrities only to be embraced by the majority shortly after. Though there may be other reasons for purchasing the new trend, I would say that the majority of people do it to be socially accepted. The funny thing about this is it causes people to wear clothing they would otherwise think was weird and would never pick on their own if it wasn't in fashion. Think about those pictures of yourself from years gone by (ow my goodness look at that outfit, what was I thinking!).

Herd mentality is often seen in the stock market. For example, in 1999 before the Internet bubble burst, people should have known that the build up was irrational and bound to collapse. Instead people kept pouring money in, in part because that was what everyone else was doing. This is fairly common in the markets (you know when your butcher and barber are talking about a stock, it is probably time to sell).

The thing about herd mentality is that following the herd doesn't necessarily mean that you are making a bad decision. Something I have noticed is that some people seem to have an anti-herd mentality. They automatically do the opposite of , or have the opposite opinions of the majority. I think the important point is that when making decisions, you need honestly ask yourself how much you are being influenced by this sort of thing vs. using more rational methods.

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