HERD BEHAVIOR and HOUSING BUBBLE

Submitted By:GROUP-1 Bushra Akhtar - 1021009Pranati Dash - 1021019Pratikshya Patnaik - 1021020Priyanka Mohanty - 1021021Sonal Priyadarshini - 1021027Tania Chakraborty - 1021028

HERD BEHAVIOR

HERD BEHAVIOR

• Herd behavior describes how individuals in a group can act together without planned direction. The term pertains to the behavior of animals in herds, flocks and schools, demonstrations, riots and general strikes, sporting events, religious gatherings, episodes of mob violence and everyday decision-making, judgment and opinion-forming.

HOUSING BUBBLE

HOUSING BUBBLE• Traditionally, housing markets are not as prone to bubbles as other

financial markets due to large transaction and carrying costs associated with owning a house.

• However, a combination of very low interest rates and a loosening of credit underwriting standards can bring borrowers into the market, fueling demand.

• A rise in interest rates and a tightening of credit standards can lessen demand, causing a housing bubble to burst.

• Other general economic and demographic trends can also fuel and burst a housing bubble.

• Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply which takes a relatively long period of time to replenish and increase.

• Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand.

• At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices - and the bubble bursts.

Individualality decreases as size of group increases…

1. Some  research suggests heard behavior increases as the size of the group increases. Why do you think this might be the case? 

• Yes herd behavior increases as the size  of the group increases. • The bigger the group the more powerful the pressure and the more

the person will feel comfortable doing.   The human mind feels if more people are doing it than, the less risk it has.   Conformity (“the adjustments or one’s behavior to align to the norm of the group”) might play a big role in heard behavior.

• As the group of the size increases group will follow certain norms. • If  one of the person find any benefits from any resources then

every one in the group try to gain benefit from same resource. • If any member added to group, he/she need acceptance by

group. Thus the member is susceptible to conforming to the group norms.

1. Contd…• Group can place strong pressure on individual member to change

there attitude and behavior to conform to the group standards.  • Every individual try to compare with other group members and try

to be equal with them. • In these kind of situation when a new member enters the group

he/she is not sure of the decisions needed to be taken and even confused about the previous traditions of the group, hence new members find it difficult to differ from the core members.

•  Herd behavior requires compromise in order to sustain itself. The larger the herd the more conformity is required in order for the herd to survive. Thus population size and resources dictate behavior.

2.  One researcher argues that “pack behavior” comes about

because it has benefits. What is the upside of such behavior? 

• In certain ways pack behavior have benefits. • Pack behavior was seen most commonly in an exclusive circle of people

with a common purpose.• The pack will be leaded by a individual in a group who can restrict  the

other individuals in the group. • Leader will have more responsibilities with in the pack and about the

pack. • Leader will make every one comfort in the pack. • All the members will follow the pack leader and leader will use certain

methods  to keep the followers in line.• The social psychology concept of “group polarization” describes the fact

that when people form into a group, they tend to make decisions that are more extreme than its individual members would make alone.  For example, there are studies in connection with how juries make punitive damage awards in which the group renders a decision which outstrips even the most fervent individual member’s pre-deliberation number.

3.  Shiller argues that herd behavior can go both ways: It explains the housing bubble, but it also explains the bust. As they see others bidding down home prices to abnormally low levels.” Do you agree with Shiller?

•  Yes I agree with Shiller.• Mostly, the decisions made by a herd is irrational and is

-driven by emotions,

-greed in bubbles,

-fear in crashes of bubbles.• We can also observe  herd behavior go both ways in share market. • For example if there was any negative news regarding a company  then

people immediately begin sell  off  shares of the stock. In other way if any good news about a company was reported in the news then people start buying the company shares which will drive up the stock price.

4. How might organizations combat the problems resulting from herd behavior?   

• If a group is cohesive, members are more motivated to work together toward a single goal --- that is, make their project a success.

• Instead of becoming angry over disagreements, groups should learn how to stick together. 

• Organizations can promote ingenuity and people's personal choice. They also might choose to promote people with personality and genuine decision and morality.

• Group results cannot be attributed to any single person, the relationship between an individual’s input and group output is clouded.

• There are several ways to prevent this :- • Set group goals, so the group has a common purpose to strive towards• Increase intergroup competitions, which again focuses on the shared outcome.• Engage in peer evaluation so each person evaluates each other person’s

contribution.• Select members who have high motivation and prefer to work in group.• If possible, base group rewards in part on each member’s unique contributions.