Page 148 - (DK) The Business Book

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IN CONTEXT
SWIM UPSTREAM. FOCUS
Business behavior
GO THE OTHER WAY. KEY DATES
1841 Scottish journalist
Charles MacKay documents
IGNORE THE herd behavior in his book,
Extraordinary Popular
Delusions and the Madness
CONVENTIONAL of Crowds.

1992 Indian economist Abhijit
WISDOM V. Banerjee publishes A Simple
Model of Herd Behaviour.

IGNORING THE HERD 1995 In “Herd Behaviour,
Bubbles and Crashes,” German
professor Thomas Lux claims
prices and sentiment affect
one another, so feelings of the
herd affect prices (for example,
faith in the housing market
pushes up prices).

2001–06 The housing bubble
in the US and parts of Europe
gathers pace before collapsing
in the 2007–08 financial crisis.

he herd instinct is clear in
nature and just as clear in
T business. Most people feel
more comfortable following what
others are doing than standing out
as a “loner” or maverick. Ignoring
the herd takes great psychological
strength. When stock markets rise
steeply, new—perhaps first-time—
investors get sucked in by the
apparently easy pickings. These
latecomers to a booming “bull
market” cause share prices to propel
upward for a last time before they
slump back toward their previous
value. By following the herd in this
way, most first timers invest when
share prices are near the top and
usually sell when they find that their