Eight
Herd Behavior and Epidemics

A fundamental observation about human society is that people who communicate regularly with one another think similarly. There is at any place and in any time a Zeitgeist, a spirit of the times. It is important to understand the origins of this similar thinking, so that we can judge the plausibility of theories of speculative fluctuations that ascribe price changes to faulty thinking. If the millions of people who invest were all truly independent of each other, any faulty thinking would tend to average out, and such thinking would have no effect on prices. But if less-than-mechanistic or irrational thinking is in fact similar over large numbers of people, then such thinking can indeed be the source of stock market booms and busts.

Part of the reason people's judgments are similar at similar times is that they are reacting to the same information—the information that was publicly available at that time. But, as we shall see in this chapter, rational response to public information is not the only reason that people think similarly, nor is the use of that public information always appropriate or well reasoned.

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