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[Charles Mackay] "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one".
[Keynes] "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally". Humans have a strong desire to be part of a group: the group offers safety, confirmation and simplifies decision-making. Further, if something should go wrong, it is more comforting to be with others than to be alone
[Graham] "Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, "Oh, I'm really sorry. You seem to meet all the tests to get into heaven. But we've got a terrible problem. See that pen over there? That's where we keep the oil prospectors waiting to get into heaven. And it's filled - we haven't got room for even one more". The oil prospector thought for a minute and said, "Would you mind if I just said four words to those folks?" "I can't see any harm in that", said St. Pete. So the old-timer cupped his hands and yelled out, "Oil discovered in hell!" Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. "You know, that's a pretty good trick", St. Peter said. "Move in. The place is yours. You've got plenty of room". The old fellow scratched his head and said, "No. If you don't mind, I think I'll go along with the rest of 'em. There may be some truth to that rumor after all".
[Cote, Sanders] Herding Behavior: Explanations and Implications, 1997
"Three variables, reputation concern, consensus forecast credibility, and forecast ability affected herding behavior. Subjects with greater concerns about their reputations and consensus forecast credibility exhibited higher levels of herding behavior. Forecast ability was inversely related to the level of herding behavior".
In his book, the Psychology of the Stock Market, David Dreman describes an experiment that demonstrates the "pressures of compliance." Each subject was asked to pick which of three lines on a card was the same size as a single line on a second card. Dreman wrote, "The lines were of such disparate lengths that there should have been no difficulty in immediately choosing the one of the proper length." Of eight people who participated in each group, seven were confederates and one an actual subject. As the experiment progressed, the confederates would go from indicating the correct line to calling out wrong answers. The pressures of group opinion increased the rate of error tenfold as subjects simply "went along" and also responded incorrectly, whether they thought the group was right or wrong! The natural and human response is to remain a part of the community. Exclusion from the community equates to being "wrong." Thus, "compliance" is a strong element in our behavior.
Herding Among Individual Investors, Dorn, Hubermany and Sengmuellerz, 2003
"The conjecture that investor sentiment leads important groups of investors to act similarly and thereby affect prices is an important ingredient of models of noise trading and style investing".
Herding, Information Cascades and Volatility Spillovers in Futures Markets, Radalj and McAleer, 2003
This paper uses futures position data in nine different markets of the Commodity Futures Trading Commission (CFTC) to provide a direct test of herding behaviour, namely the extent to which small traders mimic the positions of large speculators".
Herd Behavior in Financial Markets, BIKHCHANDANI and SHARMA, 2001
This paper provides an overview of the recent theoretical and empirical research on herd behavior in financial markets. It looks at what precisely is meant by herding, the causes of herd behavior, the success of existing studies in identifying the phenomenon, and the effect that herding has on financial markets".
Price Variations in a Stock Market with Many Agents, Bak, Paczuski and Shubi, 1996
"We construct simple models of a stock market, and argue that the large variations may be due to a crowd effect, where agents imitate each other's behavior".
Herd behavior and aggregate fluctuations in financial markets, Cont and Bouchaud, 1998
"We present a simple model of a stock market where a random communication structure between agents generically gives rise to a heavy tails in the distribution of stock price variations in the form of an exponentially truncated power-law, similar to distributions observed in recent empirical studies of high frequency market data. Our model provides a link between two well-known market phenomena: the heavy tails observed in the distribution of stock market returns on one hand and 'herding' behavior in financial markets on the other hand. In particular, our study suggests a relation between the excess kurtosis observed in asset returns, the market order flow and the tendency of market participants to imitate each other".
Herd Behavior and Cascading in Capital Markets: A Review and Synthesis, Hirshleifer and Teoh, 2001
"We review theory and evidence relating to herd behavior, payoff and reputational interactions, social learning, and informational cascades in capital markets. We offer a simple taxonomy of effects, and evaluate how alternative theories may help explain evidence on the behavior of investors, firms, and analysts. We consider both incentives for parties to engage in herding or cascading, and the incentives for parties to protect against or take advantage of herding or cascading by others".
The Behavior of Institutional Investors: Tests for Herding, Stealth Trading, and Momentum Trading, Sias, 2001
"Institutional investors' demand for a security this quarter is positively correlated with their demand for the security last quarter. These results are attributed to institutional investors following each other into and out of the same securities ("herding") and institutional investors following themselves into and out of the same securities ("stealth trading"). Our results are most consistent with the hypothesis that institutional investors herd as a result of inferring information from each others’ trades".