The Herd Mentality: 14-04-2004

Writing in today's Warsaw Business Journal Zbigniew Piekarski spoke of "The herd mentality"
http://www.wbj.pl/?command=article&id=22061&type=wbj (www.wbj.pl/?command=artic...1&type=wbj)

He cited two examples from Ireland:

In the Republic of Ireland, the smoking of tobacco in all workplaces and public places was banned, and this ban had the support of the majority of the population, including smokers. Also on that day and in the same place, over 5,000 individuals voluntarily declared that they were liable to tax on their offshore bank accounts. This is happening in a country whose popular culture revolves around smoke-filled public houses and where in June 2002 an investigative report running to more than 10,000 pages implicated Charles Haughey, a former prime minister, and many of the political and business elite of large scale and systematic tax evasion running for over 20 years.

The significance of these two acts are as follows. The Republic of Ireland was one of the first to experience an unprecedented economic boom. Now there are signs of stress and of it ending. The subconscious belief of the herd is that the good times will continue only if they can reform and improve human nature and their own cultural predisposition.

Click to expand...

Does he have a point? Are we victims of the herd mentality?

Ajapale
(mods if this does not belong here please move it )

The significance of these two acts are as follows. The Republic of Ireland was one of the first to experience an unprecedented economic boom. Now there are signs of stress and of it ending. The subconscious belief of the herd is that the good times will continue only if they can reform and improve human nature and their own cultural predisposition.

Click to expand...

That argument seems a little specious to me to he honest...

It makes no sense to me at all.

Charlie Haughey was exposed during the boom years.

The investigation into the tax evasion was started in the boom years.

I don't think we are trying to improve ourselves in an effort to extend the boom.


Brendan

arski

"Charlie Haughey was exposed during the boom years."
I though most people knew about his antics during the early eighties? I did anyway, as did many of those in the media who were brave enough to speak out ( and get their phone tapped ! )


"I don't think we are trying to improve ourselves in an effort to extend the boom". I think many people in Ireland are hard working and are trying to improve ourselves. If we improve ourselves, and are fortunate with external influences on the economy ( overseas economic conditions etc ), then the economy will boom.
If the economy continued to boom, it would surely be more preferable to an economic bust ?

Re: arski

So we are ALL agreed on this. There is NO Herd Mentality.



-Rd

.

im wit yuse
dont leave me bhind
remember the devil takes the hindmost
F16

Re: The Herd Mentality

A mention of the herd mentality today reminded me of this early post of mine from April 2004!

What caused the stampede?

I was worried there for a minute, before I realised this was a 5 year old thread:

Now there are signs of stress and of it ending.

Click to expand...

[broken link removed]

THE FORMER chairman of Ulster Bank, Sir George Quigley, says banks were driven by “herd instinct” into reckless lending due to the highly competitive banking environment in which they operated over recent years.


Speaking ahead of a public lecture yesterday at the Royal Irish Academy (RIA) in Dublin, Sir George said that no financial institution could have “remained a wallflower” watching rival lenders “pirouetting around the dancefloor”.


He said that had banks reined in their lending and been more prudent, shareholders would have demanded higher profits that were being made by rival institutions.

Click to expand...

I know its not an argument that will get much sympathy from people but I actually think he has a valid point. Once Anglo Irish Bank began its steller rise offering returns on equity far in excess of what the other Irish banks were producing, the banks had to react. Any bank that did not take part in the property development and speculation market and missed out on returns during the boom years would have been slaughtered by shareholders. They were all chasing the same business and so without a shadow a doubt their lending practices became much more aggressive. I have heard stories about what terms Anglo offered to developers and it was frightening.

Of course the whole point of a regulated market is that this sort of thing should never have been allowed develop. The Central Bank and regulator should have seen this 'herd mentality' and stepped in. Can anyone seriously tell me how Irish Nationwide (a building society) was allowed to build up a balance sheet where the vast majority of assets were loans to developers?

Sunny said:

I know its not an argument that will get much sympathy from people but I actually think he has a valid point. Once Anglo Irish Bank began its steller rise offering returns on equity far in excess of what the other Irish banks were producing, the banks had to react. Any bank that did not take part in the property development and speculation market and missed out on returns during the boom years would have been slaughtered by shareholders. They were all chasing the same business and so without a shadow a doubt their lending practices became much more aggressive. I have heard stories about what terms Anglo offered to developers and it was frightening.

Of course the whole point of a regulated market is that this sort of thing should never have been allowed develop. The Central Bank and regulator should have seen this 'herd mentality' and stepped in. Can anyone seriously tell me how Irish Nationwide (a building society) was allowed to build up a balance sheet where the vast majority of assets were loans to developers?

Click to expand...

I agree completely.

Sunny said:

Can anyone seriously tell me how Irish Nationwide (a building society) was allowed to build up a balance sheet where the vast majority of assets were loans to developers?

Click to expand...

Sounds like a question for the Financial Regulator.

Sunny said:

I know its not an argument that will get much sympathy from people but I actually think he has a valid point. Once Anglo Irish Bank began its steller rise offering returns on equity far in excess of what the other Irish banks were producing, the banks had to react. Any bank that did not take part in the property development and speculation market and missed out on returns during the boom years would have been slaughtered by shareholders. They were all chasing the same business and so without a shadow a doubt their lending practices became much more aggressive. I have heard stories about what terms Anglo offered to developers and it was frightening.

Click to expand...

Before embarking on similiar adventures, would it not have been prudent of the other banks to go public with Anglo's ploy. Thereby, either reigning in Fingers' recklessness or at least allowing the public to know what risks their money was open to, once they decided to follow suit. By hiding this info (that most of the produce of the coop was in one extremely dodgy basket) surely the others were equally complicit? A lot of safe investors would not have wanted their money treated like a gambler's last throw of the dice.

Simeon said:

Before embarking on similiar adventures, would it not have been prudent of the other banks to go public with Anglo's ploy. Thereby, either reigning in Fingers' recklessness or at least allowing the public to know what risks their money was open to, once they decided to follow suit. By hiding this info (that most of the produce of the coop was in one extremely dodgy basket) surely the others were equally complicit? A lot of safe investors would not have wanted their money treated like a gambler's last throw of the dice.

Click to expand...

I take your point. Especially about small investors who thought they had a safe investment and solid dividend. They didn't understand the risks. Unfortunately these shareholders don't matter to the banks. They only care about institutional investors and these guys were getting as carried away with the returns generated by the banks as anyone. They weren't going to shout stop. Especially in this country when the banks all own large portions of each other. Nobody is going to rock the boat and ask the difficult questions. That is why you needed a strong regulator. To be fair, I don't think there was anything hidden. Everyone knew what the banks were doing and what they were lending to. I just think everyone passed the buck on making sure the risks were manageable.

Was at a conference in the UK a few months ago when one of the heads of the FSA stood up in front of a room of professional investors/analysts and asked a simple question: 'Where were you?' He nearly got hung from a tree but he had a fair point. Nobody had asked the difficult questions because everything was rosy. Banks had shrunk credit departments, became reliant on rating agencies and generally got lazy and were simply following one and other into where ever money was being made. Even when they didn't understand the risks

The "herd mentality" was mentioned again today.

I heard the AIB internal audit whistleblower say today that bankers will allways tend to herd but that it is the role of the directors/regulators to ensure that this tendency is mitigated/managed.

Gracchus: "I think he knows what Rome is. Rome is the mob. Conjure magic for them and they'll be distracted. Take away their freedom and still they'll roar. The beating heart of Rome is not the marble of the senate, it's the sand of the coliseum. He'll bring them death - and they will love him for it. "

ajapale said:

The "herd mentality" was mentioned again today.

I heard the AIB internal audit whistleblower say today that bankers will allways tend to herd but that it is the role of the directors/regulators to ensure that this tendency is mitigated/managed.

Click to expand...

There were a few factors. Lack of fear of getting prosecuted was one. Lack of fear of financial reprecussions i.e. playing with other people's money. Government lack of oversight and actual encouragement. Believing in your own BS.