Have you ever seen a herd, peacefully grazing? Suddenly, something spooks them and they begin running. Obviously, only a few individuals in that herd may have seen a pack of wolves or a pride of lions; but all are running. There is considerable survival value in joining in the stampede, as opposed to waiting until you see the wolves or lions for yourself. This tendency can be seen in schools of fish, flocks of birds, herds of animals, and us. Why? Because we are all social animals.
Now here’s a fascinating fact. Remember the rat’s brain? It was almost all Limbic System, right? If you look at “higher animals,” there is a larger Neocortex. Dogs have a larger Neocortex than cats. In fact, the greater the social structure of an animal species, the greater is the development of the Neocortex and hence, the PFC. It has been suggested that the Neocortex developed to help animals keep track of the group, its dominance hierarchies and kinships. It only secondarily took on the task of long-term planning and of making complex decisions.
Our early protohuman ancestors, because they were small and weak, had to rely on each other for survival. We had to know our kinships (that’s why women get together and work out who knows who and who is related to whom.) We had to know who the dominant male and female was, and who was next in the line of succession; who was generous with food and who would stand with you in a fight; who would comfort you and help you if you were ill or injured. And so we, as part of our biology, have an intense attraction to others and to group dynamics, to social interactions. We have a strong need to fit in and go along with the crowd. Our survival depended on it.
And if the crowd is panicking and acting irrationally, we are likely to do so, as well. If we panic during a market sell-off, it’s not because we have “lost control of our emotions,” it’s because it’s a natural human behavior. Waiting to see the lion to confirm your reason for running may be the worst act of “calmly assessing and deciding what to do” in your life!
And that’s why we have market sell-offs and tulip bulb manias. Because we have millions of years of evolution telling us that, if the crowd is running, “Run like Hell!”
4 comments:
Interesting blog. Good to see other folk bring facts to count in debates about human behaviour.
While I believe what you suggest about the origins of our Herd behaviour is true and also the dangers it brings to (for example) investors who follow others blindly, it also brings many wonderful things with it which shape and flavour our world (even if we'd sometimes like to pretend otherwise). The richness of human life is - for good or ill - largely about our interaction with other people (real or imagined). As Freud put it, "we can never escape the Other".
Indeed, there is a strong argument to suggest that were it not for our Herd nature, we'd have nothing of the things which we value in the modern market economy world (and thus no opportunity to avoid the herd in investment strategy).
My latest book Herd - how to change mass behaviour by harnessing our true nature (Wiley's 2007) is just one attempt to make sense of this all-too-human frailty (or is it strength). Please pop by the blog http://herd.typepad.com sometime and share your views
Best
Thanks Mark
You have an interesting blog. I have a few more posts scheduled on herd behavior and I think that you are right. Herds move the markets, not individuals. We need to understand the behavior of herds.
Suddenly one of my favorite blogs to read! Excellent idea -- well-written and very thoughtful. So the key may be to go along with the crowd as long as the crowd is not overly exuberant or fearful... ? Then perhaps, one should think for onself before one runs off the cliff, too. Thank you for sharing your insights.
Thanks Anon
Isn't that what we want as traders - movement? And that must represent a mass movement. Individuals have no impact on the market.
But I'm not advocating jumping off a cliff. as you say, we must retain our capacity to think.
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