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The Pros And Cons Of Herding

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In the Financial and Banking world, there exists a phenomenon called herding. Herding is a mental state characterized by group decision-making, causing people to follow with the majority. As herding is based off the investment choices of others, it has the ability to be both rational and irrational, a boon and a bust. As the future is uncertain, investors often find themselves in the herd mentality to create a sense of security. While there are things that can be done to combat the downsides of the herd mentality, it is in the best interest of investors and people that nothing is done to regulate herd mentality as is group security. First is a summary of what herding is in the financial world. Herd mentality occurs is when people follow the majority was the conventional wisdom was “Gee, all the other guys are in equities, so I ought to be in equities, too. If it does down, we’ll all go down together.” (Cassidy, 2009, pg. 178) This mentality meant that people saw that markets are inherently more fragile and unstable; therefore working the market alone is unsafe (Cassidy, 2009, pg 178). This rational establishes a sense of security for investors; therefore, more will invest into the market with a sense of insurance as others are doing so as well. …show more content…

In How Markets Fail by John Cassidy, the story of Black Monday is given as an example of irrational herd mentality. In 1987, the New York Stock exchange almost crashed because people believed it was crashing (Caddidy, 2009, Pg. 166). According to Cassidy, “The crash apparently had nothing to do with any new story other than the crash itself.” (Cassidy, 2009, pg. 168). This event is a self-fulfilling prophesy as investors think the market is going bad, causing the market to go bad. There were no outside events such as war or famine to cause the crash, only the internal workings of the

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