University of Bonn
The 'herd instinct' is less important than expected in share-buying
Shareholders seen to be swayed by the buying pattern of other shareholders much less than has hitherto been assumed. This at least is the conclusion arrived at by economists of the Bank of England and the universities of Heidelberg and Bonn. Together with the corporate consultants McKinsey they scrutinised the share-buying behaviour of about 6,500 persons in an Internet experiment. They found no signs of 'herd instinct' during the experiment – on the contrary, some of the test subjects decided against buying those specific shares which had just been bought by so many other players. Psychologists, particularly, mistrusted those shares which they regarded as overvalued. This strategy benefited them enormously: on average they were markedly more successful in their speculation than physicists or mathematicians – or even economists.
On average the psychologists earned three times as much as economists and physicists in the stock exchange game. 'They tended to decide against buying shares precisely when a lot of other players had bought them,' Dr. Andreas Roider of the University of Bonn's Economics Department explains. Many discussions up to now have assumed the opposite: investors, it was thought, behave like lemmings. They always buy those shares which are most in demand at a particular time, thereby pushing the share prices too high (or too low). Hardly any explanation of the turbulences on the financial markets are without some reference to the marked predisposition to the herd instinct which allegedly investors show. Yet it might also be the case that each investor has decided in favour of buying independently of the behaviour of other investors – for example, because information has become available about a particular share which argues in favour of buying. Whether shareholders really are influenced by the 'herd instinct' is therefore hard to determine in practice.