Herd Behavior in High Tech Markets

The stock market frenzy of recent has been a thing to behold. Something fundamental has happened – actually crept up on us – that has turned the traditional herd behavior so characteristic of past market events into a new stampede phenomenon. Anyone who has tried to herd cattle knows that it is not as easy as it looks and that, importantly, it takes time to get them all moving in the same direction. Stampedes are something else. The volatility we have all experienced, big time, these last weeks (both up and down) has been an ever more important indicator that something has taken hold of the market to which we have given insufficient attention and that will continue to have a fundamental impact not only on markets, but on individual economies and the world economy too.

 

 

The stock market frenzy of recent has been a thing to behold.  Something fundamental has happened – actually crept up on us – that has turned the traditional herd behavior so characteristic of past market events into a new stampede phenomenon.  Anyone who has tried to herd cattle knows that it is not as easy as it looks and that, importantly, it takes time to get them all moving in the same direction.  Stampedes are something else.  The volatility we have all experienced, big time, these last weeks (both up and down) has been an ever more important indicator that something has taken hold of the market to which we have given insufficient attention and that will continue to have a fundamental impact not only on markets, but on individual economies and the world economy too. 

 

What we are seeing decidedly changes the nature of the game (some would say crap game) and is transforming the very underpinnings and reality of the whole business.   And it is all connected to the total adoption of technology by all players in the markets.  This is really only a decade old, and its full implementation only a matter of years.

 

Now, I am not a Luddite.  I have all the toys and all their bells and whistles.  But, the impact of technology on our lives – in every way – is only slowly unfolding

 

And, it is unfolding before our eyes in the markets   We all know that laptop computers, cell phones, and all other hi tech tools have increased the speed of communications and the movement of data light years – and it continues to do so ever more rapidly with every passing day.  Our world, indeed, is very different from what it was only a decade or so ago.  And these differences are seen throughout all aspects of society – from voting, to buying, to selling, to interacting, to investing, etc.  

 

In many sectors and areas of activity, the impact of technology adoption is very positive.  In the markets, however, it is potentially hugely disruptive if we do not understand its role and put safeguards in place.  Because when you put instantaneous reaction capabilities side by side with herd behavior so familiar in the market (ever since the stock market opened) you have the likelihood of stampedes – of extreme results and extreme movement in seconds.  In the past, many people would grab on to rumors but would need time to react to the information.  That led to corrections and even to depression.  But, it all took time to happen.  Today, it happens in seconds – all push their buttons at the same moment and huge shifts happen before anyone has time to consider what is really going on.  This new reality makes the shifts we see seem prophetic and harbingers of what is to come  -- even more significant “corrections.”

 

But corrections aren’t any longer the only thing we have to fear.  The market, under these circumstances, is far more dangerous to all actors and even more dangerous to nations and their economies.  It suggests, unless we fully grasp the impact of technology adoption on the markets and put new procedures and processes in place, that we could quite easily stampede into a panic driven decline that would put Bernanke’s study of the depression to the test.  This is no joke and we better get smart fast.  Herd behavior to rumors, and ensuing panic, is now very likely to get out of control.

 

Reviews

  • JRodgers

    August 24, 2007

    I agree that volatility is hear to stay and disagree with Allismellisyour. More safeguard need to be put in to the markets.

  • Sam Cass

    August 24, 2007

    Very interesting article. I tend to agree that technology provides a mechanism for players to react faster, and thus reinforces herd mentality. At the same time as Allismellisyour mentions, it also allows information to be more widely available, helping to potentially diffuse the stampede.

    My opinion is that herd mentality is human nature. Technology reinforces this mentality, makes reactions almost knee-jerk and thus will probably increase volatility as you state.

    I think we'll probably have longer periods of calm followed by some very violent swings.

  • Allismellisyour

    August 24, 2007

    Technology is only a platform to disseminate information. Your argument (that technology spreads information faster and thus increases volatility) presupposes that all available information is internally consistent. If anything, technology increases the amount of available information, including conflicting information, information that may or may not be related, and conflicting interpretations of available information.

    Do you really think having a crowd of traders in a floor responding to the same newspaper or rumor is better?

    Investors now quickly research before making decisions, to see if they agree or not with the herd reaction. By spreading information that rarely leads to a clear, consistent picture, technology decreases volatility.

  • Theo1954

    August 23, 2007

    Two competing emotions - fear and greed - going wild. Technology, as you identify, is a factor, but there is too much money sloshing around and hedge funds are also a factor.

  • marlene

    August 23, 2007

    I have never thought of volatility this way. It is pretty scary. Thanks.

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