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".
"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
"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".
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".
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.
Among Individual Investors, Dorn, Hubermany and Sengmuellerz,
"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".
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".
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".
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".
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".