Herd Behavior

So many absurd things become normalized over time.

Remember when it was strange that Central Banks did QE? Remember when Crypto Currencies first launched? Remember dial up Internet? When we first got these devices with glass screens with QWERTY keyboards?

Over time we become numb to the strange. Initially we might notice but if everyone else plays along we gradually nod our heads and fall back asleep — people fall in line with the herd.

This type of behavior is the exact reason why we have bubbles in financial markets.

Another related concept is the “career risk” factor in personal behavior. The gist is simple: you don’t get fired if you copy what everyone else does and do slightly worse than average, but if you try to be different and fail, you might get canned.

This idea applies in many areas but especially in investing and especially where the players involved are dealing with OPM (other people’s money). Sadly many such folks have zero fiduciary responsibility to those whose assets they manage or they work at such large organizations they feel disconnected from the consequences.

These so-called asset managers and investors simply show up, punch their clock, copy what everyone else is doing and go home to a comfortable life. Meanwhile absurdities build up all around them much like the frog who gradually boils in a slightly increasingly hot pot of water.

Multiples expand. New highs are reached across markets. Truths like positive interest rates are part of life are casually tossed aside. Entirely new extreme notions like “unicorns” and “ICOs” are hatched.

But these career-preservers just punch the clock. Day in. Day out. Eyes glazed over they never care to disagree. Why take a chance they are wrong?

These Notions: herd behavior and career risk are powerful ones in our World. Besides these, ideas like cognitive biases and other simple concepts can explain very well why are Markets are so absurd.

However they don’t account for the fact that ultimately, Reality counts. In the long run, Risk exists and markets correct.

That is why these behaviors, while tempting in the short run, are catastrophic in the long run.

Bubbles burst. People wake up.

So while it may be tempting to nod along. To follow the herd and to punch the clock. Avoid it if you can.

It may feel lonely for awhile but you’ll be happy in the end.

DAL