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