Herding Bubbles

Often we make our choices the easy way. By that, I mean we see what other people are doing and follow their lead if the outcomes look good. It’s easier than digging deeply into the background pros and cons and, of course, we don’t really have the time to do that. If something looks really good, we want a piece of the action, and now, before it’s too late.

This is the stuff of what economic bubbles are made of, and participation in the rush is known by the people watchers as herding, although flocking seems to be a better descriptor.

During the building of a bubble, some do very well, but, as usual, there will be tears when the ephemeral structure bursts. As we philosophize over our beers, we all agree that we won’t do that again, but of course we do. After all, next time a bubble may not really be a bubble, it may be a trend to a sustainable state.

So what should we do when we see a herd building a bubble? Ask a physicist of course. Eugene Stanley and his fellow physicists took on the question, experimented, modeled and reported out in the current Proceedings of the National Academy of Science (1).

The experiment seemed simple. Their students acted as lab rats and had to choose one of two rooms to receive an equal share of whatever resource that room held. The room resources were kept secret. The sequence was repeated 30 times with participants being able to change rooms each time. Physicists like to be thorough, so the experiment was repeated with the relative resource in the rooms being biased more heavily with each experiment. They also added a cyber herd to the mix in various levels of herd size.

Cutting to the chase, following the herd is a bad idea when the resources are even. The herd leads to ruin with very small potatoes for everyone. As the resource in one area moves to very heavily outweigh that in the other, everyone in the herd gets a reasonable share and a stable equilibrium is achieved. As the size of the sneaky cyber herd grows, the transition from ruin to happy equilibrium isn’t achieved until a higher resource imbalance is in effect.

 At first sight this result seems somewhat comforting as if there is a really good thing going, more of us can join in and the bubble doesn’t have to burst. So can we embrace this as good news? Well, think globally. Look at the huge discrepancy in resources between the developed and undeveloped world. Where is the stable equilibrium as the herd moves to the high resource region?

  1. www.pnas.org/cgi/doi/10.1073/pnas.1105239108

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