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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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Leuchtenberg sad, “There was no single cause of the crash and ensuing depression,” [Doc2]. Many things as stated earlier contributed to the crash, such as overexpansion of credit, goods, industries and rising rates of unemployment. Many Americans saw the Stock Market as an easy way to create wealth by buying stocks cheap, usually at a margin, and selling for a higher price, hopeful to profit. Buying on margin was the act of paying some money on a stock, but loaning the rest from a bank who expected would be paid back when profit was made. Stocks became more expensive to the point where nobody wanted to buy them because of their extreme price.

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Inflation, played a role in the crash, “an unwarranted increase in currency and bank credit” (Patterson). Employment is what led to people not able to make payments back to the banks, which in turn made the banks fail. Some people were even taking out their money of the banks which also forced banks to close.

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WWII instead, ended the Great Depression. The stock market was one of the last events to happen before the Great Depression and it was a contributing factor to the Depression. The other factors include Coolidge not giving federal relief to farmers, wealth not being equally distributed, having a large supply, but no demand, and debt from buying on margin. These other factors compiled into the stock market crash.

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October 29, 1929 was perhaps one of the most dreadful days in American history for its economy. Before “Black Tuesday”, as it was known, stock prices had been dropping. As a result, America experienced a devastating reality known as the Stock Market Crash. Many economists hold the belief that it was caused due to people “buying on margin”. The effects of this were detrimental and quickly lead us into a depression, and not only for America, but around the world as well.

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When someone holds a certain opinion, then softens or changes it, they may be trying to change themselves to fit in with the group. For example, a teen might change their style and wear something new not because they like it but because a group they want to join is wearing it. Another sign of herd mentality is one that strongly impacts teens and younger generations. It is most commonly known as FOMO, which is the Fear Of Missing Out. It is hard to watch other people enjoying different activities and not be included.

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Filled with prosperity and growth, everyone thought the twenties were the start of a great run for the United States. Dr. Dice, a business professor at Ohio State University, predicted that the stock market would continue to gain in the near future, more than ever before (Document 6). But, he went on to say that it would eventually collapse. Not only did he know that it cannot continue to grow forever, but he realized that small investors have begun to take part in the game of stock. He saw that such investors would add to the vulnerability of the market.

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Black Monday was Black Tuesday, during which stock prices plummeted, and 16,410,030 shares were traded immediately on the New York Stock Exchange in one single day. The stock market crash was not the sole cause of the Great Depression, but it greatly impacted the economy, speeding up the collapse of America. Although the economy was greatly affected, the people suffered as well, with nearly 30% of citizens suffering from unemployment. Unfortunately, the economy wouldn't be the only thing impacted by the crash, as several people's lives would soon take a turn for the worse. Many people lost what they thought was everything, “Men and women lost their life savings, feared for their jobs, and worried whether they could pay their bills” (“Stock Market Crash of 1929”).

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From this happening it led to a decrease in profits, which made investors sell their stocks. Many investors sold them, which ultimately led to the crash and the economy entered a period of

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On October 24, 1929, famously known as “Black Thursday” the US stock market crashed as millions of Americans sold their overpriced shares, a record 12,9 million shares were sold only for that record to be smashed again five days later when 16 million shares were sold, and this day is infamously known as “Black Tuesday” (Editors, 2009). This highlights how much the American population trusted the stock market and the banks that some had placed their entire life savings into these shares, which were now worthless. Calomiris & Mason (2003) argue that bank distress in America further exacerbated the economic decline, and it significantly affected the borrowers and economy. They go on to state that it also meant that millions of Americans would be in debt as they had taken loans or credit to purchase these shares (Calomiris & Mason, 2003). Moreover, this stock market crash led to record levels of unemployment, a sharp decline in production, and a fall in prices (Graff, Kenwood & Lougheed,

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