Friday, June 09, 2006

Lemmings and herd mentality or herd behaviour

This post in updated in 2024.

Lemmings are small rodents usually found in the Arctic. They breed very quickly and when their population reaches a certain critical mass, they are known to commit "mass suicide" by leaping off the cliff*. This strange behaviour of Lemmings continue to puzzle many scientists but they have found similar behaviour in people living on a small island south of Malaysia. But since there are no cliffs around, these people employ foreign maids and constantly abuse them for pleasure. Some believe that stress incurred by scarcity of food and overcrowding causes Lemmings to behave abnormally.

Most investors in the stock market, according to the guru, behave like Lemmings reaching a critical population mass. They begin to mindlessly follow others, sell when the market is falling like crazy, or buy more when the market is already over the top. This is why markets crashes or goes into bubble mode so often. In investment lingo, this is also known as herd mentality or herd behaviour.

For some people, it may sound stupid to mindlessly follow the crowd, but essentially, we humans like to follow trends, be it going after the latest fashion (Hermes, Rolex, anyone?), business ideas (remember bubble tea from Taiwan?) or hot stock ideas (GameStop, ouch!). Next time you think about jumping on some bandwagon with no concrete positive story, remember the Lemmings, and the cliff just round the corner.

See also Mr Market

*According to wikipedia, it has not been proven that animals can commit suicide. Lemmings jumping off cliffs is part of a migratory process which unfortunately results it many deaths. See link below:

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