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Tag Archives: herd behavior

Affecting the cost of animal feed and lowering the amount of milk from cows, the drought is pushing up milk prices.

This sign in Arizona’s Petrified Forest was having little impact:

“Your heritage is being vandalized every day by theft losses of petrified wood of 14 tons a year, mostly a small piece at a time.”

However, after some sign experimentation, they understood why. Researchers tried out 2 kinds of signs.

  1. Paired with a picture of visitors admiring and photographing a piece of wood, the sign asked people to leave wood in the forest.
  2. Paired with a picture of a person taking wood, the sign asked people not to remove wood.

 

Their conclusion? Because the signs conveyed different social norms, the first one was more successful than the second in generating desirable behavior.

Similarly, the same researchers looked into why a group of homeowners had not reduced energy usage when asked either 1) to reduce resource use, 2) help future generations, or 3) save money. However, they did respond more proactively when told, “The majority of your neighbors are regularly undertaking efforts to reduce energy. Please do it too.”

Again, the same conclusion. The key is establishing a social norm. People seem to engage in a requested behavior when they find out that everyone else is doing the same thing.

Where does all of this take us? Flip an issue to the positive side to get the behavior you want. Say that most people pay taxes, a lot of us conserve energy, and many individuals vote to get more people to do the “right” thing. Also, econlife looks at how a health insurance mandate and social norms could be connected.

In “Following the Herd,” Chapter 3 from Nudge and in this Freakonomics podcast, you can hear more about how social norms shape our behavior. And, for a more academic discussion about the Petrified Forest experiment and others, you might enjoy this paper written by a group led by Robert Cialdini.

Finally, are you a follower? When asked, participants in social norm experiments emphatically said no. And yet, the data in the experiments indicated the opposite.

 

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By Mira Korber, guest blogger.

Just the other day, I walked outside to find all six of my horses facing the exact same direction, muscles tensed, ears pricked, nostrils flared…Clearly their horsey intuition was picking up on some obscure, equine-eating bogeyman undoubtedly lurking just on the other side of the pasture fence.

I’ve seen it more times than not. One horse is startled, the others follow suit. Pretty soon, you have a stampeding herd of animals feeding off the fear of one.

So what does this have to do with economics, anyway? It turns out that people aren’t so different from our four-legged friends.

The very same behavior can describe the housing bubble at the heart of the most recent economic crisis. Prominent economist Robert Schiller discusses how the influence of the herd contributed to the real-estate bubble’s burst.

Here’s the Scenario: Jack decided a truly low value house was a good investment because he individually misinterpreted its market value. So he decided to buy the house. Jill sees the transaction. She then assumes that buying a house is a good idea just because Jack did, not realizing that Jack overvalued his new home.

And the cycle continues. The rational expectations hypothesis — that people make decisions considering all known economic conditions — has instead given way to irrational exuberance.

Herd behavior could also factor in to the euro-zone crisis and Greece. According to The Economist, Europeans want to avoid making any decisions that might lead to a mass (herd-mentality) panic. Widespread concern abounds that if the recent debt swap deals fall through, the euro-zone would be at risk for collapse.

In these two situations, you can see how an optimistic or pessimistic groupthink mentality affects mass behavior. In the housing situation, blind confidence in the upward surging (and likewise imaginary) home values ultimately lead to disaster. In Greece, private creditors and legislators alike are tiptoeing around negative expectations to avoid financial ruin.

The Economic Lesson

Herd behavior leads to what is known as information cascades. Such cascades are behavioral imitation of a certain activity, whether it be buying a home, selling stocks, or even choosing a restaurant for dinner. In other words, people base their decisions on the judgments of others, and mimicry ensues. This shows how we often turn to our social instincts in times of economic uncertainty.

For a comical take on the behavior, check out this video of a herd of horses. Then, look at this satire of humans exhibiting herd mentality.

An Economic Question: When and where have you experienced herd behavior? Have you ever decided to do something just because a friend or neighbor has? 

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