June 24, 2004

The herd instinct

Steven Den Beste pointed me to Clay Shirkey’s commentary on Power Law distributions. Very interesting. I have long pondered what I think is the same phenomenon under a different name – the herd instinct.

The interesting thing about the herd instinct is that it’s rational. If somebody is doing something, saying something, thinking something, the chances are greater than 50% that that person is doing it for a good reason, so if you don’t have anything to base your choice on, the most rational thing to do is follow the other person’s lead.

There are two problems with this. The first should be obvious – that “greater than 50%” is not particularly good odds, just better than the alternative. But people tend to fall in love with their choices – for a good psychological reason, that being indecisive is also bad. The best strategy for dealing with this problem is to continually re-evaluate your choice without becoming indecisive – but only when you have the option of changing you mind!

The second problem is more subtle, because you have to think about it from a systems point of view, where second order effects can become more important over time than first order effects (but actually, most things in real life are like that). There are some things where even if the first person made the right decision, the fact that everybody follows the leader makes it the wrong decision. You can’t make money on the stock market just by being right. You have to be right when everybody else thinks you’re wrong. So, knowing nothing about a particular stock except that everybody’s buying it, the best choice you can make is not to buy it.

I often make choices precisely because I think that most people wouldn’t make them – in those areas where crowds are distinctly negative, like finding parking spaces. On the other hand, I don’t take that strategy in choosing a car to buy; I want one that has a good reputation! As a general strategy, I think that it’s probably best to follow the herd in areas that are unimportant to you, or in which you don’t want to bother to educate yourself.

But I would hope that there’s something important enough to you – for you to find your own way.

Posted by David Boxenhorn at June 24, 2004 12:11 AM
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