It seems sort of obvious that investors, a generally bovine group when not in asinine mood, will tend to congregate in herds and then charge about randomly, often over the edge of the nearest cliff. If this is true, however, it poses a set of puzzles that it's not clear that any of the current approaches to understanding mass market behaviour can properly explain. Certainly this behaviour isn't efficient in the sense of obtaining the right price for a security, because deciding what to do based on the person running about in ever-decreasing circles next to you doesn't come close to propagating useful information. However, if investors are irrational in herds then this implies that somehow their behaviour is synchronised and it's certainly not clear that the simple set of isolated psychological biases that analysts currently work with is anywhere near sufficient to explain this.
Flocking and Herding
A simple model of flocking in computer models has been shown to be sufficient to generate surprisingly realistic herding behaviour – the sort of thing we looked at in Boids, Bacteria and Market Behaviour. Being able to show that this type of model can produce something that looks like the synchronised behaviour we see in the real-world is a long way from explaining how it works, however, because humans demonstrate intentionality – that is, we don't normally work on some pre-programmed autopilot but have internal motivations that cause us to do things based on personal preferences. Or do we? One of the other noticeable attributes of humanity is its strong tendency for mimicry. From a very young age human children copy adults and the urge to imitate is found in many higher animals. Indeed it's been suggested that the large human brain evolved in response to selective pressures to copy others. This idea would be more credible if there weren't dozens of alternative evolutionary theories for the size of our crania – this one-size-fits-all theorising is one of the reasons why many people are sceptical of adaptationist claims: natural selection can be adduced to explain everything, so in the end may explain nothing.
This aside, it certainly seems that mimicry lies behind a lot of observable animal behaviour, from mate selection through to dietary choices. Especially in situations of uncertainty it makes perfect sense to copy what everyone else is doing. You just hope…