Following the crowd: social norms and herd behaviour

Imagine your teacher reminds the class: “Please hand in your project by Friday.” Next time she says: “Most of the class has already handed theirs in.” Nothing else has changed. Yet the second message may give some students an extra push to finish. Why should news about other people change what you do?

A café with a queue probably serves good coffee, so joining the queue often makes sense. Copying what others do like this is called herd behaviour. But copying has a trap. In a 1997 laboratory experiment by the economists Lisa Anderson and Charles Holt, one of two jars was picked in secret. The two jars held different mixes of two kinds of ball. In turn, each student drew one ball from the chosen jar in secret, then made a public guess about which jar it was.

When the first guesses agreed, later students usually copied them, even when their own ball pointed the other way. That was sensible: two guesses tell you more than one ball. But from then on, each guess said nothing about the guesser’s own ball. So if the first guesses were wrong, the whole room could end up wrong. This is an information cascade: people stop using what they know and follow the crowd. A 2001 repeat of the experiment found the same.

So in the tax and doctor trials, telling people what others do beat a plain reminder or a page of facts. But the effects are modest: in the tax trial, about 4 to 5 percentage points, or 4 or 5 more people in every 100. Small effects still matter, because a letter costs almost nothing and can reach millions. The last card shows what happens when almost everyone moves the same way at once: a rush that builds fast and fades fast.

When far more people suddenly want something, demand (how much people are willing and able to buy at each price) jumps. If the price doesn’t rise, buyers want more than the shops have, and shelves empty. Where the price can move freely, as with shares (small slices of a company), it shoots up instead. A rising share price can then pull in more buyers, who copy the first ones.

In January 2021, shares in GameStop, a US chain of video-game shops, rose more than 1,600 percent in just over two weeks. From its peak on 28 January, the share price fell more than 86 percent by the end of the first week of February. The Nasdaq, a measure of the share prices of many US companies, is packed with technology firms. Between the start of 1996 and March 2000, it rose to almost five times its 1996 level. By October 2002 it had fallen 78 percent.