Herding
Following what other investors are doing in place of one's own analysis. For a professional it can be individually rational, since being wrong with the crowd is safer than being wrong alone.
Where you will meet it
Herding appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Set out the behavioural biases that investors commonly show
“Herding substitutes other people's conviction for one's own analysis, and confirmation bias filters out the evidence that would have changed a view.”
- Discuss how behavioural factors shape the decisions of an investment team and propose ways to limit their influence
“Groupthink and conformity suppress dissent, especially when a senior member speaks first; overconfidence and the illusion of control encourage concentrated bets; confirmation bias filters evidence toward existing views; anchoring ties forecasts to earlier numbers; loss aversion and the disposition effect delay selling losers; and herding pulls the team toward consensus positions.”
- Explain herding and how it links to market anomalies
“Herding is following the crowd in place of independent analysis, and it is not always irrational at the individual level: a manager who is wrong alongside everyone else keeps their job, while one who is wrong alone does not.”
Practise it
Practise herding until it is automatic: questions that explain every wrong option.
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