Alexander Chatterjee 20/03/2020 business, individuality

Following the herd

Blog

For the last week, I have been quarantined at home and a bit ill: I don’t have the Corona virus (yet!) but just the ordinary cold.Due to that, I could not update this article last Sunday.But while in bed and spending some time in the digital space, I was able to see the effects of the Corona pandemic on our world. It’s not just a pandemic that is going against our well-being, it disrupts our everyday life as well:

  • financial markets are transitioning into a recession
  • hordes of people raided shopping centers around the world, stocking on staple food, medical masks and disinfectants.

Focusing on these two cases, I’ve observed that the majority of population is following a trend. I picture it as a herd of livestock running mindlessly in one direction.


Why do we follow herds?

Following a trend makes us feel safe as we are part of a group that copies each other’s actions; psychologically, when we are not able to take a decision, we feel safe to follow the same actions as the majority of our tribe: this phenomenon is called social proof [1][2].

It is a dangerous phenomenon, since in this situation we don’t think and are just creating more momentum for the herd, without judging if the decision is smart or ethical for us and the group.

In the case of financial markets you hear a lot of advice to sell stocks or ETFs and convert them in bonds, which accelerates a crash in the market.

As for the Corona craze in shopping centers, we copy the person next door in order not to be faced with famine or to avoid contact with the virus.


Using the herd effect to your advantage

Let’s stop racing and walk for a couple of minutes: in the two examples does it make sense to follow the herd?

If you look at the crash of 2008 and 2001, investors that held to their ETFs as well as their stocks did not lose money. Actually, some profited from a low valuation of certain stocks (e.g. APPL was around $20 in 2008 [3]), taking advantage of the herd effect.

While some are stocking surgical medical masks, it has been shown that wearing a mask does not really help you much [4]. And soap is as good as alcoholic gels, which are overly consumed. This is an opportunity for companies to make more money (e.g. some major breweries are now producing hand sanitizers, which will bring them another line of revenue in the months to come [5]).


Thinking as an individual

Following a herd is as deeply embedded in us as our flight-or-fight reaction to danger. It’s hard to escape it.

But I would advise anybody to think as an individual and rationalize the given situation. Check which makes more sense: joining the herd or walking away from it.

In such moments thinking outside of the box could bring you more benefits than simply using your instincts.


References