Thursday, November 18, 2010

Herd Mentality

Via Pragmatic Capitalism (H/T Phil's Stock World).
This past summer I filmed this video (below) in Germany in the Englischer Gartens where a flock of sheep were grazing. What was distinct was that the sheep were grazing entirely on one side of the road and the grass was wearing thin as they moved ever closer to the edge of the road. The grass was noticeably more green and plentiful on the other side, however, none of the sheep ventured over.  Eventually, one sheep (for whatever reason) had the bright idea of crossing the road and moving into uncharted territory. Then a few more followed.  Then more.  And before I knew it the entire flock was surrounding me. Within minutes there were hundreds of sheep running across the road in unison to the other side.
It was fascinating to watch this herd mentality in real-time as it closely resembles what we often see in human behavior and specifically markets. The smart money makes a wise move, more investors follow, enthusiasm ensues, the public pours in, greed trumps fear and before you know it there is a severe disequilibrium and ultimately a collapse. What you don’t see in the video is the culmination. I had to move because I was quite literally afraid I was going to be trampled by sheep, but what happened seconds after this video ended was like a bubble bursting in a marketplace.
Click Here to Read: Herd Mentality 

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