An Economic Psychological Approach to Herd Behavior

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Herd behavior refers to the phenomenon of people following a crowd for a given period, sometimes “even regardless of individual information suggesting something else” (Banerjee 1992, 798). The phenomenon of herd behavior was among the first topics studied in social psychology (Van Ginneken 1992). Early economists like Thorstein Veblen (1899) and sociologists like Georg Simmel ([1904] 1957) applied it to sudden shifts in consumer behavior such as fashions and fads. More recently, issues relating to herd behavior have again caught the eye of economists and management scholars. In 2003, Marlene Fiol and Edward O’Connor, for instance, maintained that the decisions of individuals to do whatever anyone else is doing can be applied to decision-making processes in organizational settings. In the economic approach, however, the concept is turned into something which differs from herd behavior in social psychology. As a result, researchers in the social sciences these days face inconsistent conceptions of herd behavior.

Herd behavior, however, cannot be fully understood from a single perspective alone. What was argued by John R. Commons (1934) for economics and psychology in general could also be applied to the study of herd behavior. Although both disciplines ask what herd behavior is, the economic perspective primarily is to focus on long- term effects, to study the value of (partaking in) herd behavior and how much one can benefit from it. The motivations underlying herd behavior are viewed in terms of the choices they produce. With respect to this mainstream economics approach, Geoffrey Hodgson (1993) came to the conclusion that, in doing so, many economists have taken individual motivations and preferences as given, because “the essential aspects of human personality and motivation are conceived of as independent of the social relations with others” (236). The psychological perspective, on the other hand, is to account for the subjective value of herd behavior per...
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