Daughters and Leftwing Voting - Andrew Oswald.pptVIP

Herds, Houses and the Crisis*Andrew Oswald *Many thanks to Danny Blanchflower and Amanda Goodall for valuable ideas. Men … think in herds; they go mad in herds, … they only recover their senses slowly, and one by one. C. Mackay Extraordinary Popular Delusions and the Madness of Crowds, by Charles MacKay, published in 1841. Extraordinary Popular Delusions and the Madness of Crowds, by Charles MacKay, published in 1841. Far from the Madding Crowd, by Thomas Hardy, published in 1874. Extraordinary Popular Delusions and the Madness of Crowds, by Charles MacKay, published in 1841. Far from the Madding Crowd, by Thomas Hardy, published in 1874. (in which a herd of sheep plunge to their doom from a cliff). Herd behaviour is very often natural and individually rational. But it has the potential to be disastrous for the group. Herd behaviour is very often natural and individually rational. But it has the potential to be disastrous for the group. On a technical note To economists and any mathematicians here: On a technical note To economists and any mathematicians here: I have in mind a class of problem where utility depends on relative actions. A general point about the mathematics of imitation A general point about the mathematics of imitation Caring about relative things is not sufficient to give us Keeping-up-with-the-Joneses. Imagine a person is choosing an action a to solve: Maximize u(a) + v(a – a*) – c(a) where a* is what everyone else is doing. Then if v is concave (convex) in status, it is rational to act similarly to (deviantly from) the herd. The main point can be made without any mathematics. Subconsciously, humans are frightened of falling behind: Subconsciously, humans are frightened of falling behind: Home buyers paid extraordinary?prices in order to keep up. Bank lenders and brokers felt they had to match rivals.?? Money managers -- rewarded on relative performance against other manag