Herding

Topics: Herd behavior, Observation, Individual Pages: 2 (588 words) Published: November 15, 2010
Herding, in the traditional sense, is the phenomenon by which ‘‘everyone does what everyone else is doing, even when their private information suggests doing something quite different’’ (Banerjee, 1992). In economics and in general in everyday life, people’s decisions are influenced by those of others around them. Herd behavior and informational cascades have been used to explain many social phenomena, such as manias, panics, financial and currency crises, bank runs, etc, as well as other economic phenomena like the failure of agents to adopt the most efficient technology.

2. Benefits of herd behavior are in many cases. For example, when people know and already tried some products, if they realize that it is value for money or make them satisfied. They can also tell others to buy it. The company will get advantage from this spread widely. They will get more revenue for herd behavior and customers also get good products.

3. Shiller argues that herd behavior can go both ways: It explains the housing bubble, but it also explains the bust. As he notes, “Rational individuals become excessively pessimistic as they see others bidding down home prices to abnormally low levels.” Do you agree with Shiller?

To make the decision whether we should agree with Shiller or not, we should understand the definition of rational person first.

It is recognized that no person is always rational -- that there are degrees of rationality. "Full rationality" will be defined as a reference point, while acknowledging that most humans will be somewhat less severe than this. A rational person would make a strong effort to determine all the significant facts necessary to make a particular decision before that decision is made. A rational person would look at the facts behind every issue before making a decision no matter how comfortable or uncomfortable it might make him or her feel. A rational person would clearly establish the criteria from which she will make decisions. The...
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