Herding is detrimental in the world of investment - The Irish Times - Fri, May 27, 2011

Herding is detrimental in the world of investment - The Irish Times - Fri, May 27, 2011:

"Herding, which in a biological sense is the tendency for some species to seek safety in numbers, is easy to understand from an evolutionary perspective. Being part of a group and taking cues from others reduced the risk of falling prey to a predator on the Serengeti for example, whilst simultaneously increasing the odds of a successful hunt for meat. Furthermore, imitation of others was a successful strategy that enabled the rapid transmission of good ideas throughout a group of humans, while monitoring the actions of others also yielded important information about resource availability and mating potential.

However, though herding proved beneficial to our ancestors in the African savannah, the same behaviour typically proves detrimental in the investment world. The human instinct to imitate others can lead to the mispricing of assets as individual investors base their decisions on expert opinion and slavishly make investments simply because the experts expect the uptrend to persist."