Herd Behaviour

Herd Behaviour is involves people using the actions of others as a guide to sensible behaviour, instead of independently seeking out high-quality information about the likely outcomes of these actions.

Here, people not take their independent decision, they see, observe others decisions and driven by those decisions. They are not going to evaluate other’s decision before using it as benchmark, just follow other’s decision blindly.

This kind of mentality originally seen in animals as they follow groups and roaming under the group. Same as humans follow their group and follow decisions of group.

Stock market bubbles, 2008 global crisis, and so on are the examples of herd mentality.

One real Example of Indian Stock Market-

ASTRAZENECA PHARMA INDIA LTD.

BSE Code	506820
NSE Code	ASTRAZEN
Sector	Pharmaceuticals
52 week high/low (Rs.)	1285.00/595.00
No. of shares (Cr)	25
Latest Book Value(Rs)	40.73
P/BV (x)	27.58
Beta	0.24
TTM PE (x)	0.00
TTM EPS (Rs.)	-6.61
Latest Dividend (Rs.)	3.50

03 Mar 2014- AstraZeneca Pharma India Ltd has informed BSE that the Board of Directors (Board) of AstraZeneca Pharma India Limited (Company) have, on March 01, 2014, received by email a scanned copy of the letter from AstraZeneca Pharmaceuticals AB (AZP AB) Sweden, promoter of the Company, proposing to make a voluntary delisting offer (the Delisting Proposal) to the public shareholders of the Company in accordance with the Securities and Exchange Board of India.

After above announcement price shoots up like anything, as people believe that delist price can be Rs. 1400+ and that we can experiencing in price.

18 Mar 2014- AstraZeneca Pharma India Ltd has informed BSE that, pursuant to and in accordance with Regulation 8(1)(a) of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009, the delisting proposal received from AstraZeneca Pharmaceuticals AB, Sweden, the promoter of the Company, vide their letter dated March 01, 2014, was considered and approved by the Board of the Company at its meeting held on March 15, 2014.

This shows behavior of people that reflecting into the price of the stock and drive price to upward direction. As announcement of delisting happened volume in particular stock also shoots up.

Irrationality

Irrationality is thinking, acting, behaving or talking without inclusion of rationality.

Rationality is the quality or state of being reasonable, based on facts or reason. We evaluate each and every possible steps, cost and benefits from doing something or not doing that activity. Come up with proper reason and select or avoid decision.

So irrationality doesn’t involve rationality. As tradition economic believes that people always behave rationally in every situation. But is it really happen????

Ex:-

You are roaming at forest and lion comes and stand in front of you. At that time what will you do?

Do you think about all options, cost and benefits? What’s the cost of running? What’s the benefit of running?

NO

We just start running as fast as we can.

Thus, at that time our emotion replace on our thinking system and order to run as fast as you can.     

So Irrationality is about the forces that drive our behavior that can be economic forces, social forces.

As when we come to the policies, we just can’t consider only standard economy. We think about society’s care and take a broader picture, broader perspective that just not included only rational. We also have to include what we know about human nature.

We had seen stocks bubbles (Sub-Prime crisis, IT bubble, etc.), people over extending limits of credit cards, taking mortgages, etc. in which where we can see the rationality???

Rationality says that people are strong enough to calculate everything, consider all options then make decision but in real world people are confused, have an emotions, not every time thinking about future, fall in love and so on.    

So that people behave irrationally most of the time which not included under standard economic and pre-assume that people behave rationally.

We rely on contextual information to make all sorts of judgments and decisions. Illusion under us is that we know the answer, we know the right thing to do. But in fact we are wrong. That is just a mental, visual illusion many a time which shape our decision and judgments.

Ex:-

See the below picture…… at top what color is it look like????? 

Your answer is its look like brown.

Now, at the bottom one what color is it look like????

Your answer is its look like orange.

You can’t see both the color as an identical.

Let’s see now….. Cover all side and what both color is it look like???? Is it identical????

Now, our answer is yes both the colors are identical.

It is a visual illusion which drives our decision of those both colors are not an identical.

But is it really????

No, In fact those both colors are identical. Thus, illusion which drives our decision.

Many times we took decisions which are driven by some of the forces and those are not be a rational. We are human and we makes some mistakes repeatedly again and again but benefit of being the human is that we can identifies our mistakes and can take steps for improvement.

See the above video and get more insights.....