Herd mentality not smart during dark times

In this financial crisis, it's probably best not to run with the herd.

When times are uncertain, people are wired to follow the crowd and jump on the wagon. Bank of America Corp bought Merrill Lynch & Co Inc., the U.S. government has taken over Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc. has gone bankrupt, Washington Mutual failed,and a $700 billion dollar U.S. government bailout was rejected.

With this comes fear and limited information. We see individuals abandoning their own logic and banding together to form one opinion.

All of this is biological and comes with evolution. Gregory Berns, a neuroeconomist at Emory University in Atlanta performed an experiment requiring participants to complete simple tasks of assessing simple shapes. The participants were hired actors and real volunteers. The real volunteer went into a (MRI) scanner. The hired actors would answer confidently and incorrectly. The real volunteers began to change their answers to match the actors'.

Berns explains, "The group changes how you see the world in some way. Our brains are really wired to accept the group opinion of the world." The scanner suggested that the brain's "fear center" is dominant when people are uncertain. "When people are presented with a situation where they don't have information or the information is ambiguous, we see activation of the amygdala and insula," Berns explains.

Paul Zak, of the Center for Neuroeconomics Studies at Claremont Graduate University in California says, "We are really hyper-social apes. We learn almost exclusively from each other."

Of the financial crisis, Zak says, "In this case, running with the herd may not make good sense." Zak continues and makes a good point, "I am not a financial genius. I do know that when you see millions of people in the market essentially freaking out, that spills over into your brain and you get this impulse to do what everyone else is doing."

In this financial crisis, Zak is fighting against the herd. He is buying stocks.

Click here for the complete article.