Herd Behavior
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Transcript of Herd Behavior
"It has been more profitable for us to bind together in the wrong direction than to be alone in the right one."
~ Nassim Nicholas Taleb
Herd Behavior &
The Housing Bubble(& Collapse)
Presented by:Group 5
Gautam Schaan (42)Sana Naqvi (44)
Kumar Udaar (46)Aparajita Jain (48)Tanmay Batra (50)
Overview• What is a Group?• Group Decision Making• Group Decision Making Techniques
o Nominal Group Techniqueo Brainstormingo Delphi Technique
• Groupthink• Groupshift• Conforming & Compliance• Herd Behavior• Housing Crisis• Caselet at Hand• Questions-Answers
What is a Group? A collection of individuals who have regular contact and frequent interaction,
mutual influence, common feeling of camaraderie, and who work together to
achieve a common set of goals.
Identify a list of attributes to be found in groups:
• A set of people engage who in frequent interactions.
• They identify with one another.
• They are defined by others as a group.
• They share beliefs, values, and norms about areas of common interest.
• They define themselves as a group.
This suggests that groups are intended and
organic. They are not some random experience.
They have 3 crucial characteristics:
i. There are parts
ii. There is relationship between the parts
iii. There is an organizing principle (op. cit.).
Group Decision Making
Group decision making can be regarded as the mental
processes resulting in the selection of a course of action
among several alternative scenarios.
We further discuss the following points:
•Interacting Groups
•Groupthink
•Conformity
•Group Decision Making Techniques
Nominal Group Technique
An excellent tool that enables everyone to participate in
process development.
Nominal Group Technique in four steps:
i.Silent Idea Generation
ii.Round-Robin Reporting of Ideas
iii.Discussion for clarification
iv.The ranking of problem solutions
The final outcome is therefore a set of independent
judgments.
BrainstormingA process for developing creative solutions to problems.
Steps involved:
i. Focus on a problem.
ii. Deliberate solutions.
iii. Push the ideas.
Rules:
iv. No criticism
v. Welcome unusual ideas
vi. Quantity Wanted
vii. Combine and improve ideas
The Delphi Method The Delphi method is based on structural surveys and makes
use of the intuitiveavailable information of the participants, who are mainly
experts.Approach:i. survey conducted in two or more rounds.ii. provides the participants in the second round with the
results of the first.
GroupthinkRefers to faulty decision-making in a group. Groups experiencing
groupthink do not consider all alternatives and they desire
unanimity at the expense of quality decisions.
i. Conditions: Groupthink occurs when groups are highly cohesive
and when they are under considerable pressure to make a
quality decision.
ii. Negative outcomes
iii. Symptoms
iv. Solutions
Group shiftA change in riskiness of a decision.
i. group members tend to exaggerate the initial positions
ii. conservative shift
iii. risky shift
Reasons behind Groupshift:
iv. familiarization among the group members.
v. we admire individuals who are willing to take risks
vi. the group diffuses responsibility
Conformity & Compliance
Two aspects that are important in group behavior are
conformity and compliance, both are prevalent in all types of
groups.
i. Conformity: members changing their attitudes and
beliefs, to match those of others within the group.
ii. Compliance: one must adapt his/her actions to another's
wishes or rules
Herd BehaviorHerd behavior describes how individuals in a group can act together without planned direction.
Refers to human conduct during activities such as : i. Stock market bubblesii. Crashesiii. Street demonstrationsiv. Sporting eventsv. Episodes of mob violence
The Housing BubbleHousing bubbles usually start withi. an increase in demandii. in the face of limited supply which takes a relatively long period of time to
replenish.
Causes for the housing bubble:iii. The Federal Reserve Interest Rate
Manipulationiv. Home Flippers and Real Estate Speculatorsv. Panic Buyingvi. Subprime mortgages, Exotic loans and
Loose Lending
Caselet Observations
i. Economist John Maynard Keynes:
humans are not unlike animals.
ii. Example: Housing bubble and its
collapse.
iii. Loans were easily available
iv. Banks provided loans easily.
v. In Shiller’s terms, ‘Herd Behavior’.
vi. Research in Behavioral Finance
confirmed herd behavior in investing
decisions.
Some research suggests herd behavior increases as the size of the group increases. Why do you think this might be the case?
One researcher argues that “pack behavior” comes about because it has benefits. What is the upside of this behavior?
Shiller argues that herd behavior can go both ways: It explains the housing bubble, but it also explains the bust. As he notes, “Rational individuals become excessively pessimistic as they see others bidding down home prices to abnormally low levels.” Do you agree with Shiller?
How might organizations combat the problems resulting from herd behavior?
Once spirit was God, then it became man, and now it is even becoming mob.
~Friedrich Nietzsche