An Economic Psychological Approach to Herd Behavior
Rook, Laurens, Journal of Economic Issues
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 ( 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 se. By asking "why" and "when" it occurs, the motivations underlying herd behavior are more broadly viewed in terms of the processes involved. With respect to the mainstream psychological approach, however, Jaap van Ginneken (2003, 2004) concluded that, in doing so, psychologists have hardly paid any attention to the influence which institutional settings may have. Especially when studying herd behavior in the business environment, one needs to answer the "why" and "when" of herding on both the individual and institutional level in order to understand the "how" and "how much" of it.
In this paper, first the problem of herd behavior is made clear via the historical development of the concept in economics and social psychology. Accordingly, the focus is on differences between the approaches. Second, an integrated economic psychological approach to herd behavior is proposed, attempting to overcome theoretical and methodological differences. To demonstrate its importance and to illustrate the theoretical and methodological problems that need to be overcome, the framework is applied to decision making in the presence of groupthink, a form of herd behavior that tends to be more problematic within institutional settings.
The History of Herd Behavior
Herd Behavior in Economics
In early economics, herd behavior gained the attention of researchers like Veblen that studied sudden shifts in consumer behavior such as fads and fashions. In his famous 1899 study on The Theory of the Leisure Class, Veblen wrote of patterns of conspicuous consumption in which people engage in actions by making comparisons with similar people who are slightly better off in order to express pecuniary strength. Consumption, however, was considered to be a passive activity without real value for society and the economy and was not given much attention in the field of economics (Dolfsma 2000). As a consequence, neither was the phenomenon of herd behavior.
In the early 1950s, Harvey Leibenstein introduced the social psychological bandwagon metaphor in economics. …