Series 2, Episode 13: Herding Bias
Welcome back to the bitesize behaviour podcast and today we look at a really interesting behaviour - the behaviour of herding.
Now, I’m sure you’ve already guessed from the name what this behaviour is all about, but to be absolutely clear.
Herding bias is a really interesting phenomenon where people will convince themselves that a course of action, a decision, is the right one simply because 'everybody else' is doing it. In other words, it’s our tendency to mimic the crowd without taking into consideration our own judgements - which if we did - would see us making independent decisions. It’s why fashions or trends take off. The more people join in, the harder it is for us to be on the outside looking in, and so we join in and go along for the ride.
And this works really well - is so powerful - because we are social creatures. We live our lives as part of a social, or family pack. We are surrounded by other people who share their views, opinions, beliefs with us, and it’s really hard to ignore what other people are doing or deciding. And to top it off, we’re often led to believe that there is safety in numbers, which actually presents us with a ‘get out of jail’ card to use a term from the game of monopoly…
GOING WITH THE CROWD
If you make a decision based on what everyone is doing, and it goes wrong, well everyone is wrong so you feel less negative about it. If you’re on the outside, making independent decisions and you get it wrong, you can feel isolated or even stupid that your decision wasn’t the best course of action. Get it right as part of the crowd and you get swept along with the buzz of being right. Get it right if you’re on the outside, making independent decisions and you become a maverick, which can make you feel empowered and a bit special.
But there is a risk involved in being the lone wolf and so we have a tendency, when we weigh up the odds, of just doing what everyone else does. And this is how Facebook became so popular. It created a situation whereby, for example, you were out for dinner with a group of friends, and you became the only one who wasn’t on Facebook, meaning you couldn’t join in the conversation, plus you didn’t understand any of the references that were being made. And so, to avoid being the outsider looking in, you go home and sign up. Millions of people did. But many didn’t - including me. I only know two other people who aren’t on Facebook and when I tell people I’m not on Facebook, I’m looked at as if I am a little bit strange… which I may be… but not because I’m not on Facebook!
STANDING YOUR GROUND
So what if you are truly comfortable living and dying by your own sword? By that I mean you are very happy making your own choices and when they pay off - great. If they don’t, well, you can learn and move on. What if you don’t care what other people think about the way you live your life and the choices you make. Well, this can also be very empowering and can free you from the shackles that crowd mentality can bring.
It can make you question more. It can give you an incredible independence. It can also make you be more true to your principles, your ethics, your values, perhaps even without compromise. But it can also be a lonely place at times. However, for me, I’d rather make my choices without compromise, or having the feeling that I have to join in with everyone else just to be socially accepted. There is, however, a big HOWEVER...
In some cases, going with the crowd is the right course of action and can bring about positive change, especially when your values and the values of the crowd are aligned. Think about the recent climate change marches and how tens of thousands of people gathered together as one voice, with one mission. This is when herding really can be used for good.
But when it comes to investing and money, there is a word of caution in relation to herding bias. Just because a large crowd of people believe a particular investment is the right one for them, doesn’t mean it’s the right one for you, your risk profile, or even your long term financial needs. Just because a crowd of people have made a similar decision, doesn’t mean that you should not do your own research. Sometimes we need to observe the crowd and pause to understand their motives. Understand what they understand and then make a decision based off evidence and fact. We need to make sure we aren’t just swept along with the crowd on the assumption that what’s right for them is right for us.
BE AWARE OF SCAMMERS
Many scammers use Herding Bias as as technique to get people to part with their hard-earned cash, by making them feel as if everyone else has invested in this golden opportunity, and you are the only one on the outside missing out whilst everyone else are going to retire millionaires. This is why, what I said a second ago is so important. Observe the crowd and pause to understand their motives. Understand what they understand and then make a decision based off evidence and fact.
Herding Bias is powerful. It’s a strong social bias and can easily pull us in. Sometimes that can be bad, sometimes it can be very good. We just need to be mindful that the ultimate decision that we end up taking is ours and that we need to be comfortable living with that decision irrespective of what the outcome is.
So - that’s it for today. In the next episode of Bitesize Behaviours we’ll look at a behaviour that is closely linked to herding bias, especially when others are involved in the decision making process. We’ll be looking at The Illusion of Control.
See you next time on bitesize behaviour.