Last month, we explored optimism bias. This is our inclination to overestimate the likelihood of experiencing positive events and underestimate the likelihood of experiencing negative events. Check out the full article here. This month, we’re covering herd behaviour. We’ll explore what it is and what it means for flooding and flood insurance.
We are all at least somewhat influenced by other people. Our friends, family, colleagues, celebrities and even strangers influence us positively and negatively. Perhaps naturally, many people tend to want to fit in with their wider group. This leads to dominating trends, from music to fashion, and from politics to TikTok dances.
Got an iPhone in your pocket? Wearing the latest Nike trainers? You’re likely a victim of herd behaviour. As you might guess, this refers to individuals following others and imitating group behaviours rather than deciding independently – acting like a herd. John Maynard Keynes formalised the idea in 1930. He defined it as an individual’s response to uncertainty, based on the assumption that others are better informed than them.
“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”John Maynard Keynes. (General Theory, 1936)
If we put aside the survival benefits of cattle warding off predators, herd behaviour is generally associated with irrationality. Rather than individuals thinking about a decision rationally, weighing up the various options, herd behaviour leads them to automatically follow the behaviour and movement of the group. That behaviour may be right, but there’s certainly no guarantee.
However, like many of the heuristics we’ve explored, herd behaviour can have benefits. It typically saves us a lot of time on fairly minor decisions, like what phone to buy or what clothes to wear. It can also promote positive behaviours or encourage awareness of certain issues.
Imagine two restaurants next to each other – one crowded and the other empty. For many people, that tells them everything they need to know – the crowded restaurant is better, so they should go there. Of course, this ignores a whole range of other factors – the cuisine, the cost, the quality of the food. Herd behaviour is at play in two ways. First, the individual wants to fit in and go to the restaurant that others have chosen. Second, they assume those in the busy restaurant are better informed than them – they are eating in the busy restaurant because they know it is the superior restaurant.
Another example is how people behave in different settings. The same person will likely behave very differently at a football match compared to when they are at work. In either case, there is often a desire to fit in with the surrounding group, as well as social norms around how you act in each setting.
Finally, the stock market is an oft-cited hotbed of herd behaviour. When the value of a company share creeps up or down, individuals tend to flood to buy or sell. Most of the significant trends in the stock market usually feature this mass frenzy of buying or selling. This frenzy resembles a stampede – when the herd loses control.
When it comes to those at risk of flooding, herd behaviour plays a role at multiple decision stages:
As with other flooding-related actions, individuals will often follow the crowd when it comes to taking out flood insurance. If people they know do not have cover, they may decide they don’t either. However, these can leave them underprepared for a flood.
As a broker, showing a business-owner how similar businesses have chosen to protect themselves against flood can help encourage them to take up protection. Take a look at some of our case studies here. If you have a specific client in mind, get in touch. We’ll do our best to show you how members of the flood risk herd are turning to smart flood insurance in increasing numbers.
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