Herd Behaviour

Topics: Herd behavior, Information cascade, Decision making Pages: 3 (753 words) Published: December 19, 2012

In the process of decision-making, people are influenced by others. This tendency of people is called as “herding” in social life. For example, if one of the person find any benefits from any resources then every one in the group try to gain benefit from same resource. As another example; if there was any negative news regarding a company then people immediately begin sell off shares of the stock. In other way if any good news about a company was reported in the news then people start buying the company shares which will drive up the stock price. Imperfect information, concern for reputation, and compensation structures are considered as the most important potential reasons for rational herd behavior in financial markets.

The argument this article is “herd behavior” and it is argued with its simple model. On the other hand, Banerjee does not discuss 'herd behavior' in financial markets in this article. His argument is based on 'herd behavior' in an abstract environment. This means that agents who have private information make their decisions in sequence.

There is a common understanding that herding in financial market by participants lead to destroying of steady and increases the fragility of the financial system. Recent years witnessed an increased concern in herd behavior in financial markets. Many scholars sugggest that herd behavior may be a reason for excess prices volatility and financial system fragility.

Our choices are influenced by others' opinion that is called as herding behavior. In this article, Banerjee describes situations in which individuals learn by observing the behavior of others. According toBanerjee; “in a sequential game, if the first two players have chosen the same action, all subsequent players will ignore their own information and start a herd behavior”. The second person's decision to ignore her own information and join the herd compels a negative externality on the others. Banarjee suggests that...
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