• Antal Ertl

Herding or how to (not) go with the majority

Why do people tend to follow the crowd? Is it because they feel that the crowd knows more than them? Or is it because they have a deeply-embedded, evolutionary behavioral tendency to follow? Now is one of the best times to answer these questions. The unprecedented effect of coronavirus madness on purchase behavior is an ideal case to probe into one of the most important behavioral concepts: Herding. 

In many areas of life, may it be regular supermarket shopping, financial investment, or choice of brands, people conform to others when making decisions. This arises from people’s susceptibility to be influenced by ‘what others around them are doing.’ The toilet paper hoarding proves to be a good example, as such, people stock toilet paper more than they stock staple goods, even though it is the latter that will ensure them survival. In addition, even though toilet paper can be used as a substitute for tissues, the absurd amount of its purchases does not make sense. (The last time we checked, diarrhea was not a symptom of coronavirus). It might be that there is a psychological phenomenon in play which shifts people’s attention from what matters to what doesn’t matter, and presents itself in the supermarket purchase behavior. Accordingly, as people rushed to buy toilet paper, others observing them felt that ‘they must know something’ and their innate tendency to herd led into the inexplicable hoarding of toilet paper. However, what causes this behavior?

Asymmetric information: we think that others know better

Let's have a look at Shiller’s (2015) famous restaurant example: “You have received mixed evaluations about restaurant A and favorable evaluations about restaurant B. When approaching the restaurants you note that restaurant A is significantly more crowded than restaurant B.” Which one would you choose to go to? When confronted with this situation, the majority chooses to go to restaurant A, ignoring their private information and trusting the ‘wisdom of the crowd’, referring to the collective information that the crowd possesses. Accordingly, the current supermarket behavior can be explained through utilising this concept. The significant shift in the purchase behavior was not only caused by the health concerns, but also from the desire to follow the crowd.

Let's consider another example. Have you ever cheated on a test by copying from your fellow classmate? This might also be considered as herding: you expect your neighbour to be more knowledgeable than you are – as such, it seems like a good idea to copy from her (all the wrong answers). This problem has its roots in asymmetric information. You yourself know that you don’t know the answer for the questions asked, but you do not know whether your friend knows it or not. You are faced with a decision: should you take a guess, or should you copy from your friend? While in this situation the solution is that you should just study more, other situations are not solvable with such objectivity.

Something similar can happen in the stock markets, when there is a great rally or a great devaluation around a stock. Individual investors can find it hard to answer the question: do other investors know something that I don’t? Or am I walking into another financial bubble? In such a scenario, transaction and information costs are considerable, and they are at least partially responsible for such occurrences.

When herding becomes rational

Based on the previous points, one could expect herd behavior to be wildly irrational – as we do not act upon our own interests and preferences, but rather we just accommodate ourselves to others. Surely, this can happen a lot: think of the last time you purchased something just because it was popular, but in reality, you did not need such an item. Wanting to be fashionable can be such a scenario.

But let’s say that you are going to invest in the stock market. You invested a hefty amount of money into Constellation Brands INC., a company which produces some of the most popular alcoholic beverages and has good financial fundamentals. Unfortunately for you, Constellation also produces the wildly popular “Corona beer”, which, as you might have noticed, has a bad reputation due to its name. And in line with the stories often told by Richard Thaler, the stocks started to drop, just because of its name!

Now, depending on your time horizon, you can decide what to do. If you are in for a long time-horizon, you might still keep your stocks – after all, it should be just a temporary anomaly, right? However, if you are only in for the short-term (or you desperately need liquidity, because your other investments were in the oil industry…), then you are inclined to take your losses and go with the crowd, and sell your stocks – further decreasing their values. The volatile environment, the growing uncertainty and panic in general are also key in such a situation (see our blog on panic here: Are We Right to Panic?). 

This is what happens when your beer shares its name with a global pandemic (Source:

Another aspect you might want to consider is social interactions. You might be inclined to disregard your self-interest and go with the herd because we, as a species, are social animals – we want to belong somewhere. If this comes with the price of not deciding the right way, we might still take it depending on our personalities; we might be wrong, but we will be wrong together.

Social aspects - Asch’s conformity test

Perhaps the most famous experiment was conducted by Asch in 1951.  The experimenter showed the participants two cards (see below). The card on the left has the reference line and the one on the right shows the three comparison lines. The participants were seated in a classroom with a group of confederates (who were instructed to tell the wrong answers) and were asked to determine which line on the right card equals in length to the line on the left card.

Source: McLeud, 2018.

While a number of the “real” participants answered correctly, a high proportion (32%) conformed to the majority view of the others, even when this view was clearly erroneous. 

Although it demonstrates the social aspects of such decisions well, we should tread lightly with these experiments. This only states that there are people who are willing to conform blindly, in an irrational way.  Bear in mind that in this situation, there is nothing at stake – except maybe your dignity. If the risk of losing, and its consequences are greater, you might be more inclined to act “rationally”, and not just go with what the others tell you.

References and Further Readings

Asch, S. E. (1951) “Effects of group pressure upon the modification and distortion of judgment”, in H. Guetzkow (ed.) Groups, Leadership and Men. Pittsburgh, PA: Carnegie Press.

Ding, A. M. and Li, S. (2018). Herding in the consumption and purchase of digital goods and moderators of the herding bias. Journal of the Academy of Marketing Science, 47(1), pp. 460-478.

Investopedia. (2020). Constellation Brands Inc [Online]. Available at:

McLeod, S. Solomon Asch-Conformity Experiment. SimplyPsychology [Online]. Available at:

Shiller, R. J. (2015). Irrational Exuberance. Princeton, New Jersey: Princeton University Press. 

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