Nicholas Gruen writes:
[Y]ou’d think that economics would have a good theory of herding, or at least that it would be a prominent subject within the discipline. Alas, if you thought that, you’d be mistaken. When Oswald looked at the biology of herding, the canonical article was Hamilton, W. D. (1971). “Geometry for the Selfish Herd”. Journal of Theoretical Biology 31 (2): 295–311.
This theory models herding as a ‘rational’ strategy to avoid predators. The ‘game’ that gets selected for is for each animal to try to avoid being on the outside of the herd so that the predator gets to eat the outsider. It’s a powerful theory which fits (ie ‘predicts’ a lot of of biological data). …
You know how many times it’s been cited in the economics literature? Well it’s never been cited – at least when Oswald looked it up – it probably has now. …
By contrast, the prominent theory of herding in economics is herding as informational learning. Thus for instance people imitate others figuring ‘they must know something I don’t’. In a cinema, someone yells “Fire!”. People start running for the exit. Others up the back don’t hear what the yeller yelled, but they figure they could do worse than follow the herd. The idea is illustrated at the end of this famous scene. This idea can help explain financial bubbles.
But the biological herding idea seems so much more powerful. Because it suggests that a dominant biological mode is one in which each ‘agent’ seeks the local optimum of their own survival, and that this gives the group some holistic coherence, but that no-one is thinking of the group, and the group’s survival and welfare – the global optimum – is therefore the (arbitrary) result of these individual optimisations. The biological theory of herding spells danger for the herd in many situations.
I had come across Hamilton’s paper before, but this post prompted me to read it properly. It is worth it. Add it to the list of biological examples where the “invisible hand” can lead to an emergent phenomena that is costly to the group.
Audio and slides for Andrew Oswald’s speech, which triggered Gruen’s post, can be found here.