Behavioural Economics: Herd Behaviour

Professor Andrew Oswald from the University of Warwick delivered a pitch-perfect lecture on the significance of herd behaviour in his talk at the LSE tonight. If you take time to scan most leading economics textbooks at school, college and undergraduate level, the idea of herd or imitative behaviour scarcely warrants a mention. But we know that it matters deeply in many economic, social, environmental and political domains. Why has the Economics discipline been so tawdry in understanding better some of the Biology and Psychology behind the behaviour of groups? It is as fundamental to a modern networked society as it is in the non-human animal kingdom. Check out the wonderful murmuration of starlings in the video clip below for an inspirational illustration of herd instincts in action.

Herding is associated with behavioural traits such as copying, clustering, imitating and conformity. Only this week we saw the instinctive reaction of the deer in Richmond Park when black lab Fenton was let off the leash!

Paul Ormerod makes some revealing and instructive comments on copying in this excellent video from a recent RSA talk.

One of Oswald's arguments is that in the majority of circumstances, our natural, perhaps sub-conscious instincts to herd serve us well.

Imagine that a hungry lion has escaped from the zoo and broke into an open field at an event you are attending - assuming you were aware of what was happening, what would you do?

It turns out that your relative position in the crowd matters a lot! A handy tip is to find yourself someone to hide behind just as the animal gets close, the lion gets a tasty meal and is distracted, you are safe for the moment, so too is the majority of the crowd. And if the victim is an economist who believes passionately in maximising social utility, we are possibly all better off.

An almost inexplicable communitarian instinct or spirit to herd together at times of risk, uncertainty and danger is prevalent in the non-human animal kingdoms, a rational animal clusters with the others and this is particularly strongly apparent in young animals.

The importance of relative position when we thought about the roving lion was a recurring theme throughout Professor Oswald's well-paced talk. Imitative behaviour is deeply embedded in human choices (fashion is pure imitation) and most humans are afraid of falling behind in a world that continues to attach so much currency and badge value to relative incomes and lifestyles.

Many economists have written about this in the past including Fred Hiersch, James Dusenbery and more recently Robert Frank's incisive critique of the damaging economic and social consequences of status races.

Have a look at your wrists! Forget the extraneous jewellery - are you wearing a watch? If so, is it a perfectly-functioning device bought for £20 or less from a high street retailer (mine is!) or a £1000 + device sourced from a premium manufacturer?

Both watches will tell you the time perfectly (technology has already solved that problem)! But many people remain obsessed with demonstrating their relative status with conspicuous consumption - that is for a generation that wears a watch, many teenagers choose not to.

Here are two more examples of how relative status changes behaviour.

First, studies of Dutch lottery winners have shown that people who live next to a winner are much more likely to go out and buy a visible good such as a new car or build an extension to their property.

But when employees at a US university were given the opportunity of finding out precisely what their work colleagues were earning, those that chose to know and who were relatively low-paid reported large reductions in job satisfaction, morale and well-being, whereas people who came out well in a transparent pay league table claimed to be no better off or happier at all and that their work performance barely changed. Is this an argument for keeping a lid on pay transparency?

Why does herding behaviour matter?

Professor Oswald highlighted some examples of where herding has exaggerated economic and social problems:

1/ The US housing bubble from 2001 onwards through to 2006-07 - the genesis of the global financial crisis.

2/ The dot.com boom which came to a staggering collapse in 2001

3/ Herding in other financial markets including currency and commodity trading. Speculation takes market values far away from fair or fundamental values and the heightened volatility of prices impedes genuine (productive) investment and worsens poverty for the most vulnerable.

4/ The summer 2011 riots in the UK - copycat behaviour was all too apparent during the four or five days of trouble

5/ Herding and the health choices that people make. We have seen a simultaneous trend growth in obesity + a rise in the incidence of anorexia. What explains this? Oswald points to a growing body of evidence of extreme behaviour at the elite ends of society - the dangerous lifestyle and health choices of the rich and famous including unconstrained binge drinking, drug-taking and other forms of anti-social behaviour are given full rein in the media and may prompt copying behaviour that imposes huge costs on society.

Oswald argues that Economics needs to be open in drawing from other disciplines in explaining herd activity. Being part of the herd can be individually rational but socially very damaging. Although there might be examples of where copying behaviour and the power of networks can be harnessed for positive purposes for example in improving health outcomes.

Beware the return of the madness of crowds

We have seen the madness of crowds on many occasions in the recent past and further instances will no doubt re-occur because imitation is central to human life. Politicians understand better than ever before that relative positions within groups and society impacts on so many of our choices. For the moment though, they are reluctant to introduce sufficiently ambitious redistributive policies to change mindsets and the model.