Summary: Herd behavior describes how individuals in a group can act together without planned direction. The term pertains to the behavior of animals in herds, flocks and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations, sporting events, religious gatherings, episodes of mob violence and even everyday decision making, judgment and opinion forming.

Recently an integrated approach to herding has been proposed, describing two key issues, the mechanisms of transmission of thoughts or behaviour between individuals and the patterns of connections between them. It has been suggested that bringing together diverse theoretical approaches of herding behaviour illuminates the applicability of the concept to many domains,[1] ranging from cognitive neuroscience[2] to economics.

Read The Full Article Here

-

A Simple Model of Herd Behavior

There are innumerable social and economic situations in which we are influenced in our decision making by what others around us are doing. Perhaps the commonest examples are from everyday life: we often decide on what stores and restaurants to patronize or what schools to attend on the basis of how popular they seem to be. But it has been suggested by Keynes [1936], for example, that this is also how investors in asset markets often behave (the famous “beauty contest” example).’ In the literature on fertility choices it has frequently been suggested that various fertility decisions (how many children to have, whether or not to use contraception, etc.) are heavily influenced by what other people in the same area are doing.2 It has also been suggested that the same kind of factor also influences the decision to adopt new vote in the direction that the poll predicts will win; this is another instance of going with the flow. The same kind of influence is also at work when, for example, academic researchers choose to work on a topic that is currently “hot.”

The aim of this paper is to develop a simple model in which we can study the rationale behind this kind of decision making as well as its implications. We set up a model in which paying heed to what everyone else is doing is rational because their decisions may reflect information that they have and we do not. It then turns out that a likely consequence of people trying to use this information is what we call herd behavior-everyone doing what everyone else is doing, even when their private information suggests doing something quite different.

But this suggests that the very act of trying to use the information contained in the decisions made by others makes each person’s decision less responsive to her own information and hence less informative to others. Indeed, we find that in equilibrium the reduction of informativeness may be so severe that in an ex ante welfare sense society may actually be better off by constraining some of the people to use only their own information.

Read The Full Article Here

-

Asset Pricing under Asymmetric Information

The role of information is central to the academic debate on finance. This book provides a detailed, current survey of theoretical research into the effect on stock prices of the distribution of information, comparing and contrasting major models. It examines theoretical models that explain bubbles, technical analysis, and herding behavior. It also provides rational explanations for stock market crashes. Analyzing the implications of asymmetries in information is crucial in this area. This book provides a useful survey for graduate students

Read The Full Article Here

If you enjoyed that why not find a job or read our guide to working in the 21st century. You can also join our Kiva team or hire me for your project.