The madness of crowds will be back
Professor Andrew Oswald delivers thought provoking lecture
"Men think in herds, they go mad in herds and they recover slowly." Could this be a good analogy for the current economic crisis? Professor Andrew Oswald of the University of Warwick's Department of Economics gave a compelling argument for this case in an intriguing lecture last night at Cass Business School. Professor Oswald used Charles MacKay's famous quote as the foundation for his argument that human behaviour is rooted in herd mentality.
What does this mean for economics? In his lecture Professor Oswald presented the case that herd behaviour is dependent on relative positions, i.e. one's place in the herd. In economic terms this manifests as the 'keeping up with the Jones's effect'- humans compete relatively to one another. This effect is "very often natural and individually rational (and) it has the potential to be disastrous for the group."
Take the dot.com phenomenon as an example. The 'herd' was willing to bet large amounts of money on unproven stocks. Those who went against the herd, the analysts who worked out it was a bubble waiting to burst, were fired. When the bubble did burst, Mackay's theory of "Men think in herds, they go mad in herds and they recover slowly" was proven.
So can this herd theory help us to understand the current economic position? Certainly there is persuasive evidence to suggest "the madness of the crowd" was intrinsic to the financial crisis of 2008. Professor Oswald makes the case for more research into the space between social sciences and economics or, as he put it, "the madness of the crowds will be back."
Watch the full lecture from Professor Oswald