Herd behavior

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Herd behavior is the behavior of market participants in financial markets when they tend to make the same decisions that other market participants have made before them.

General

The term is a metaphor for the herd instinct that can be observed in the animal world. Herd behavior can often be encountered in everyday life, for example when going to restaurants or the theater , in fashion or when buying bestsellers . In financial markets investors sometimes tend to behave like a herd in their buying and selling decisions and to invest the majority in a trading object or to divest it . Herd behavior is a manifestation of mass psychological contagion effects and can therefore be a cause of financial market crises.

causes

One of the most important researchers to herd behavior is Abhijit Banerjee , of 1992, the herd behavior ( English herd behavior defined) as a rectified decisions which different private information is based. It implied here an asymmetrical information , which consists in the fact that poorly informed market participants see an opportunity for profit or a risk of loss from the market behavior of the better informed market participants and imitate their behavior.

Herd behavior is therefore due to the social effect of imitation . It is when a single decision maker , taking into account the behavior of other actors, opts for the same behavior as these, even if his own independent decision were different.

In addition to these information cascades, there are also the causes of the reputation model in the context of the beauty contest and network effects . Already John Maynard Keynes examined 1936, the herd behavior as part of the beauty contest ( English beauty contest ) in investment decisions . The underlying assumption is that managers for the sake of reputation in markets with imperfect information follow the behavior of other managers. This beauty contest means that financial analysts do not forecast the expected profitability of companies, but what the majority of all analysts will forecast. Any forecast errors are increased as a result. A network effect occurs when there is a certain cause-and-effect relationship between the actions of one market participant and the actions of the others. The benefit for the individual market participant increases if other market participants decide on the same product. For example, the use of social networks such as Facebook increases the more users this online community has.

Measurement

It is difficult to demonstrate herd behavior explicitly; a joint purchase / sale of a certain security by many economic agents does not necessarily have to be due to herd behavior (and thus to information asymmetries ); it can also be a coincidence. If new information makes the current price of the paper appear incorrect and if this information becomes known to many economic subjects at the same time ( perfect information ), this can result in many simultaneous sales decisions made unaffected by the behavior of other investors.

An experimental study supports the thesis that the frequency of herd behavior is overestimated.

consequences

The consequence of herd behavior are strong price fluctuations in the affected commercial property.

Herd behavior is known as market behavior, especially among noise traders , who are often guided by herd behavior and are motivated by moods or groups to buy into rising stock market prices or sell into falling prices. This is the so-called “mood noise” . Rising or falling prices are an indication that other market participants have already made the same decision. This noise can be the basis for both buying and selling decisions and also for holding decisions. Herd behavior is therefore a sign of a lack of efficiency in markets .

Speculation only becomes problematic for a market when speculation no longer takes place with the help of fundamental data, but rather herd behavior begins. Then speculative bubbles can arise, mostly due to herd behavior. Speculative bubbles can be caused by the expectation of the majority of market participants of future profit opportunities.

Profit-taking can also be based on herd behavior when a large number of investors use a high price level to sell and other investors join in. The bank run is also typical herd behavior, because investors observe a perhaps accidental mass withdrawal of cash and blindly join it, trusting that it must have a specific reason; the massive withdrawals finally culminate in the domino effect . Investors withdraw their deposit because they fear that, due to the sequential payout principle (“first come, first served”), they will no longer be able to withdraw them because the cash holdings have been used up. Hence, it is rational for any depositor to follow the herd. A bank run is to be expected the more poorly the bank customers are informed and the more they "overreact". Also hoarding are a manifestation of the herd behavior because buyers the zuzunehmenden stock situations observe and conclude that their supplies need to be repaired.

Herd behavior can lead to self-fulfilling prophecies : If market participants behave in a certain way, this can lead to the fundamentals on which an installation is based being changed by the herd behavior itself: They develop in the direction the herd is taking - consequently, it is rational not to leave the herd, which ultimately results in the expected result.

literature

Individual evidence

  1. ^ Gary S. Becker , A Note on Restaurant Pricing and Other Examples of Social Influences on Price , in: Journal of Political Economy vol. 99 (5), 1991, pp. 1109-1116
  2. ↑ Abhijit Banerjee, A Simple Model of Herd Behavior , in: Quarterly Journal of Economics vol 107, 1992, p. 798
  3. ↑ Wolfgang Gerke (Ed.), Gerke Börsen Lexikon , 2002, p. 152
  4. ↑ Binyu Zhu, Rational Herd Behavior and Its Effects on Investment Decisions , 2009, p. 12
  5. ^ John Maynard Keynes, General Theory of Employment, Interest, and Money , 1936/1964, p. 158
  6. ↑ Bingyu Zhu, Rational Herd Behavior and its Effects on Investment Decisions , 2009, p. 128
  7. ↑ Mathias Drehmann / Jörg Oechssler / Andreas Roider, Herding and Contrarian Behavior in Financial Markets: An Internet experiment , February 2003 (pdf) . Published 2005 in The American Economic Review : 95, pp. 1403-1426.
  8. ^ Daniel C. Freiherr von Heyl, Noise als Finanzwirtschaftliches Phenomenon , 1995, p. 52
  9. ↑ Bertram Scheufele / Alexander Haas, Medien und Aktien , 2008, p. 50
  10. ↑ Rainer Elschen / Theo Lieven (eds.), The career of the crisis: From the subprime to the system crisis , 2009, p. 354
  11. ↑ Springer Fachmedien Wiesbaden (ed.), Compact Lexicon Economy , 2014, p. 90
  12. ↑ Binyu Zhu, Rational Herd Behavior and its Effects on Investment Decisions , 2009, p. 7