The Herd Mentality in Business

The Herd Mentality in Business

February 9th, 2013 // 2:00 am @

herd-mentalityWithin the business world many decision follow what appear to be trends, but in fact represent the herding instinct many decision makers are influenced by. This desire to be inline with what the majority are doing represents our instincts and many corporate cultures.

This herd mentality can be seen in almost every area of business, from buying into an overpriced IPO, to outsourcing some functions to different countries, through social media marketing and a host of other examples.

The most virulent example is the feeding frenzy that can occur around certain companies’ valuations during stock price bubbles.

Stock market bubbles and unsustainable share prices have been around for 200 years, and have covered everything from the overinflated value of south seas investments, through the stock bubble around railway prices in 1893, through the internet bubble of 2000, to the high values of social media companies we have today.

The herd mentality in decision making is not restricted to share valuations, there has been in recent years a strong wave of outsourcing of IT work and call centers to India, followed by a broad realization that the cost savings were not as high as expected, and the communication issues across time zones slowed wider business development. This has led too much of this work now being brought back to home countries.

Our innate herd instinct both within ourselves and within many company cultures drives these tides in what is in vogue. They are not driven by us each looking at the same facts and coming to the same conclusions about the right way forward, if it were we would not have the busts that follow every bubble.

The cost of these herd decisions can be significant. Many clever professional investors bought into Facebook at flotation at a price of $38, as of today it is $28.50, a loss of 25% in under a year. Such high IPO prices of in vogue companies followed by the decline of their share price is a regular occurrence.

Other companies have spent millions outsourcing work to other countries and millions bringing it back, with untold damage to their wider business during these changes. It was difficult for many companies to explain to their shareholders five years ago why they were not outsourcing to India, as it is becoming equally hard to explain if they are now not bringing the work home. Not only are many people innately more comfortable in the herd, our business structures often actively encourage going with the herd.

So why is this herd instinct so strong, well it simply makes us feel safe, it does not make us safe just feel safer. We are inbreed with millions of years of evolution telling us being in the herd is safer.

Although it is also true in many company cultures being in the herd is actively if unconsciously encouraged. It is often hard to blame even horrendous business errors, if everyone else in the industry made the same mistake. And conversely even a small mistake when you are out of line with the industry can be painfully visible. It is a sad reality than in some companies staying well inside the herd even if you know where they are going is wrong, can be career enhancing.

However the truly successful are independent thinkers. Steve Jobs, Michael Dell, Bill Gates, Richard Branson, did not achieve what they did by going with the herd. Although I am sure none of them would have got a first interview at many big traditional culture companies.

The herd mentality is dangerous but hard to break, there are essentially two parts to why we herd when making decisions, the culture in which we work, and the way we think internally.

The culture issues are easier to deal with. Companies can generate an environment where true performance is measured, independent thought encouraged, mistakes seen as learning opportunities, and where “Everyone was doing it” is not a valid excuse. To do that the company needs a leader who is not a herd animal, but a maverick and a true leader.

The internal thought process is harder to change and I suspect rarely can this be achieved. We are born either curious, or uncurious. The uncurious can be encouraged to question things but will always feel safer in the herd, and that desire to feel safe is a powerful driver of human activity. Those who are curious will always be questioning everything, including every accepted “Fact” and the limits of what their peer group see as possible.

I was born curious, I just have to hear “Everyone is doing it” for the alarm bells to go off in my head. It is however a double-edged gift allowing independent thought, but making it hard to fit in within certain cultures, and it can be a lonely place on occasion.

One can experiment with stepping out of the herd. Take what is a given amongst your peer group as a fact, or an impossibility, and question it. If you decide you agree with the herd you will have built your self-confidence in what you believe, if you do not agree then you have useful insight, either way it is empowering.


Category : Blog &Other Thoughts

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