Everyone’s Doing It… So You Did Too!

When the Dubai chocolate trend blew up, suddenly everyone wanted to try it. People who didn’t even like chocolate were jumping on the trend, recording their reactions and highlighting how amazing it was. Why? The taste didn’t change - it wasn’t suddenly the best chocolate in the world. What changed was the hype. The more people tried it, the more you felt you had to join in. This is a perfect example of herd behaviour.

What is Herd Behaviour?

• When individuals make decisions based on the actions of others without independent analysis even though it may go against what they usually do

• It’s a key part of behavioural economics which studies how real people behave rather than the rational view traditional economics takes

Why do we follow the herd?

There are two widely accepted explanations for herd behave both rooted in psychology and social dynamics. The first reason is the social pressure to conform. We are social beings and with that stems the desire to be accepted by others. Often, individuals adopt the behaviour of the majority not because they believe it’s right, but due to fear of social isolation and criticism. This pressure may override personal preferences or instincts especially in group settings or social media. The second reason is the assumption that the group must be right. A key driver of herd behaviour is the belief that the collective knows more than the individual. We believe that if many people are acting a certain way, there must be a good reason. Individuals follow the group not because they have verified the reasoning themselves, but they believe others have. This leads to poor decision making on a large scale.

Real life examples of Herd behaviour

• TikTok trends: Stanley cups, Dubai chocolate

• Panic buying: toilet paper during COVID

• Cryptocurrency hype: Bitcoin increasing in value because everyone bought in

• Clothing trends: growing to like outfits because it’s popular

Why It Matters in Economics

1. Asset price bubbles

Herding can drive assets prices far beyond their true value when people invest simply because others are doing so without understanding the fundamentals, which can create speculative bubbles which eventually burst and cause economic disruption. A bubble is a situation where the price of an asset rises far above its actual value due to excessive demand. A key example is the 2008 financial crisis where many investors bought mortgage backed securities because they were popular at the time. They assumed that since so many people were investing, it must be safe. This blind trust in the crowd helped inflate the housing bubble and when reality hit, the herd panicked triggering a global collapse.

A mortgage-backed security (MBS) is an investment made up of a bunch of home loans that are bundled together. Investors get paid as the homeowners repay their mortgages.

2. Market Volatility

   When a large number of investors follow the same trend, prices can rise or fall rapidly even in response to minor events. This herding behaviour amplifies price movements, increasing volatility in financial markets. This makes decision making more difficult for firms and investors as the market is less stable.

3. Policy implications

   Governments and Economists must understand herd behaviour to design better policies. For example, improving financial education can aid individuals to make more informed decisions rather than just copying others. The UK government introduced financial literacy into the national curriculum in 2014 to promote smarter and more independent financial choices. Policy makers need to account for how herding may influence consumer spending, borrowing or investing during uncertain times and create safeguards to limit negative outcomes.

Next time you catch yourself following a trend, ask yourself, Do I really want this, or am I just copying the herd? If herd behaviour shows how easily we get swept up in the crowd, imagine if someone could nudge us toward better choices instead. That’s exactly what we’ll dive into next time — stay tuned!