"It has been more profitable for us to bind together in the wrong direction than to be alone in the right

one." ~ Nassim Nicholas Taleb

Herd Behavior & The Housing Bubble

(& Collapse)

Presented by: Group 5 Gautam Schaan (42) Sana Naqvi (44) Kumar Udaar (46) Aparajita Jain (48) Tanmay Batra (50)

Overview
What is a Group? Group Decision Making Group Decision Making Techniques
o Nominal Group Technique o Brainstorming o Delphi Technique

Groupthink Groupshift Conforming & Compliance Herd Behavior Housing Crisis Caselet at Hand Questions-Answers

What is a Group?
A collection of individuals who have regular contact and frequent interaction, mutual influence,

common feeling of camaraderie, and who work together to achieve a common set of goals.

Identify a list of attributes to be found in groups: A set of people engage who in frequent interactions. They identify with one another. They are defined by others as a group. They share beliefs, values, and norms about areas of common interest.

They define themselves as a group.

This suggests that groups are intended and organic. They are not some random experience. They have 3 crucial characteristics: i. ii. There are parts There is relationship between the parts

iii. There is an organizing principle (op. cit.).

Group Decision Making

Group decision making can be regarded as the mental processes resulting
in the selection of a course of action among several alternative scenarios.

We further discuss the following points:

Interacting Groups Groupthink

Conformity
Group Decision Making Techniques

Nominal Group Technique

An excellent tool that enables everyone to participate in process development. Nominal Group Technique in four steps: i. Silent Idea Generation

ii.
iii. iv.

Round-Robin Reporting of Ideas

Discussion for clarification The ranking of problem solutions

The final outcome is therefore a set of independent judgments.

Brainstorming
A process for developing creative solutions to problems. Steps involved: i. ii. iii. Rules: Focus on a problem. Deliberate solutions. Push the ideas.

i.
ii. iii. iv.

No criticism
Welcome unusual ideas Quantity Wanted Combine and improve ideas

The Delphi Method

The Delphi method is based on structural surveys and makes use of the intuitive available information of the participants, who are mainly experts. Approach: i. survey conducted in two or more rounds. ii. provides the participants in the second round with the results of the first.

Groupthink
Refers to faulty decision-making in a group. Groups experiencing groupthink

do not consider all alternatives and they desire unanimity at the expense of
quality decisions.

i.

Conditions: Groupthink occurs when groups are highly cohesive and when they are under considerable pressure to make a quality decision.

ii. Negative outcomes iii. Symptoms iv. Solutions

Group shift
A change in riskiness of a decision. i. ii. group members tend to exaggerate the initial positions conservative shift

iii.

risky shift

Reasons behind Groupshift:

i.
ii. iii.

familiarization among the group members.

we admire individuals who are willing to take risks the group diffuses responsibility

Conformity & Compliance

Two aspects that are important in group behavior are conformity and

compliance, both are prevalent in all types of groups.

i. Conformity: members changing their attitudes and beliefs, to

match those of others within the group.

ii. Compliance: one must adapt his/her actions to another's wishes or rules

Herd Behavior
Herd behavior describes how individuals in a group can act together without planned direction.
Refers to human conduct during activities such as : i. Stock market bubbles ii. Crashes iii. Street demonstrations iv. Sporting events v. Episodes of mob violence

The Housing Bubble

Housing bubbles usually start with i. an increase in demand ii. in the face of limited supply which takes a relatively long period of time to replenish.

Causes for the housing bubble: i. The Federal Reserve Interest Rate Manipulation ii. Home Flippers and Real Estate Speculators iii. Panic Buying iv. Subprime mortgages, Exotic loans and Loose Lending

Caselet Observations
i. Economist John Maynard Keynes: humans are not unlike animals.

ii.

Example: Housing bubble and its collapse.

iii. Loans were easily available iv. Banks provided loans easily. v. In Shillers terms, Herd Behavior. herd behavior in investing decisions. vi. Research in Behavioral Finance confirmed

Some research suggests herd behavior increases as the size of the group increases. Why do you think this might be the case?

One researcher argues that pack behavior comes about because it has benefits. What is the upside of this behavior?

Shiller argues that herd behavior can go both ways: It explains the housing bubble, but it also explains the bust. As he notes, Rational individuals become excessively pessimistic as they see others bidding down home prices to abnormally low levels. Do you agree with Shiller?

How might organizations combat the problems resulting from herd behavior?

Once spirit was God, then it became man, and now it is even becoming mob. ~Friedrich Nietzsche