05 Apr China’s Black Monday – Handling ‘Classic Herd Behavior’

Notable American economist and former Assistant Secretary of the Treasury Edgar R. Fiedler once said, “The herd instinct among forecasters makes sheep look like independent thinkers.” The reason for this type of comment by Fiedler is because uncontrolled business herd behavior has been known to causes many business losses, economic depressions and financial market meltdowns like the one of 2008 and the recent one in China. On Monday 24^th August 2015, China’s stock exchange fell by almost 8% with a resulting knock-on effect on global markets which reacted with panic sell-offs. All this occurred on the heels of a slowdown in the Chinese economy which had shown the potentially bearish growth signs and had already resulted in government interventions and currency devaluations. So just like the 2008 global financial crises was catalysed by the USA market, why were these recent signs from China not heeded? This is simply because of the effect of overly bullish group assumptions and where the basic fundamentals of the resulting decisions being taken were either not cross-checked or were ignored.

Group thinking tends to come naturally and if taking an example from nature, oftentimes animals of the same species often tend to bunch together into a massive herd. This herd triggered by the actions of one another are able to decide to energetically move in one direction at the same time. Sometimes this is irrespective of whether it is the right direction or not. In the business jungle, business herds can be described as groups of people making similar business decisions like those related to the Chinese situation. Oftentimes however, being part of a business herd, as the case may be, can be useful as a survival strategy. Furthermore, it can provide you with synergy, information, communications and joint goal achievement. Nonetheless, a business herd can also dissipate a lot of energy and cause a huge loss of value if not understood or managed well.

So manage your business herd by constantly checking to see if it is moving in the right direction or blindly moving in the wrong direction toward a catastrophic cliff. In this case, you can know when to break away from the herd by always checking the fundamentals of the underlying decisions because rational reasoning is often the first casualty of herd behavior. So if the fundamentals don’t support sound logic and rational reasoning, then you should think critically about whether to continue with the business herd or not. Simply put, if the fundamentals don’t check out, warn everyone you know involved and then you should check out of the herd. The key to being successful in a business herd is to know the purpose for being there, keep a clear head, and keep one’s eyes & ears open.