How does Greed, Fear and Herd Mentality affect humans?

We are primary governed by two emotions in our daily lives, fear and greed. While fear prompts us to avoid risk, greed involves often out stretching ourselves in order to make quick gains. They both bring out a mentality which probably has been ingrained in human brains from millions of years . It is called as herd mentality

Herd Mentality

Herd mentality describes how people are influenced by their peers to adopt certain behaviours, follow trends, and/or purchase items
Source:Wikipedia Let me point out to you some well knows examples of Herd Mentality

Stocks

I think everyone is aware of how stock markets affect people. The general rule while investing( not day trading, investing) is that you buy low, wait for a few years and then sell at giant profits. This formula may not work all the time , but nothing better has been devised. Hence it comes out as the best formula to make good profits. However , we see hordes of people selling while stocks are falling and buying when they are rising. It is exactly opposite of making profits. A lot of booms and busts in recent 50 years across the world has shown that most of the people have lost money by betting on companies for much lesser time then it needs to create the value to be profitable. [caption id="" align="alignleft" width="198" caption="Tulip Mania Source: Wikipedia.org"][/caption]  

The famous Tulip Mania

In Holland, in year 1637, prices of Tulip bulbs were pushed to extreme heights and prompted people to buy them at inflated prices. All was well till the prices came tumbling down and almost everyone lost their invested money.The desire to get quick rich was undoing of so many.

The Dotcom Boom in late 90s

Remember those days when just getting an idea could get you million dollars from venture capitalists. Thousands of dotcoms were launched in those days. Now you can count on your fingers how many are still there. The dotcom boom saw a lot of investor and venture capitalist money being wasted.

The social media bubble of recent times

The extremely high valuations of social media companies ( the kind of which are only commanded after years in traditional industries) may be an onset of social media bubble. Extremely high expectations and loud noises made about viability of social media businesses is leading up to building of this bubble. So why does these bubbles occur? An interesting theory to as to why booms and busts happen is based on emotions such as greed and fear. Human beings evolved from animals and I think it is an acceptable fact now(some would disagree :) ). Have you ever observed how animals act or react? They either need food or need to protect themselves from predators. The animal brain is attuned to survival and making most out of the recent situation. If we assume that humans evolved from these animals, the human brain still does not work different than animal brains. Seth Godin calls it a lizard brain. A lizard brain is the brain of animal( which we already head) on which new human brain has grown upon. Unfortunately in times of crisis or opportunity, the lizard brain takes over and humans either become too greedy or too fearful. When we are greedy we see opportunities that don’t really exist and when we are  fearful, we don’t  even want to look at anything useful.

Fear of losing everything

A great example of fear is when you see during stock market crashes. Stock Markets crash around the world in a matter of hours as if all fundamentals have gone bad in whole of the world. At that time, often in newspapers we see images of distraught stock brokers holding to their phones reminding us of the survivors of a sinking sip. It does not matter to them that stock market is up in a few months or even days. They have seen it many times before but they refuse to learn from the past. Most of these traders often fear losing everything that they have got, in a market crash. From experience, everyone knows that it is not true. No economy will be forever down, no company will close because suffered a small hiccup on the way. ( Some do however as an exception) . Fear also stops most of the people from taking risk. If someone is fearful of accident, he(she) would not drive and thus lose out on the fun and independence that comes with driving. People do not take risks and become entrepreneurs even though they are capable and possess great ideas that needs execution. They wait for the right time until its too late. They fear that they will lose all their money and will not be able to survive once their venture does not work out.

Fear of being lesser than their peers in anyway

It is also called as “Keeping up with the Joneses” . It means that you are benchmarking your lifestyle based on what your neighbour, peer or co-worker has presently. Often people are influenced by or mimic the behaviour of their peers , bosses, parents just to follow a well known path. While this may not be a particularly bad strategy , it does limit one’s option of making more money or living a more fulfilling life. It also puts them in comfort zone thus not utilizing their talents effectively. It also stops them from taking risks because they see life as a race and they need to constantly keep up with the others.

Fear of the unknown and uncertain

Finally, the most dangerous fear detrimental to the progress of mankind. Thousands of people have been lulled and cheated by preachers on the promise of better future. The fear of uncertain ( losing your income, family, possessions etc) keeps most people from being their best. The uncertain is a like an invisible predator that may or may not strike later but is strong enough to induce paralysis in present world. Though there are no evidence that what people think eventually happen or they have any control on things that do happen, people just refuse to take calculated risks and enjoy life on their own terms. [caption id="attachment_2321" align="alignleft" width="223" caption="Greed"][/caption]

Greed

Greed is an excessive desire to possess wealth or goods with the intention to keep it for one's self.
Source:Wikipedia Greed is totally opposite of fear. Here the tendency is to hoard and not share your knowledge or possessions with the world. Greed also is tendency to make short term gains as a replacement to gains in the future. Tendency of being greedy to make money in short amount of time caused immense havoc in the history.  Dotcom boom, mortgage crisis and booms and further recessions are big examples .

The Kahneman and Tversky experiment

In one of the experiment, Kahneman and Tversky postulated two scenarios.

Case 1:

Participants in the experiments were granted 1000$ each. They had to chose from one of the following options.
  1. They would be granted 500$ additionally if they chose to take it now.
  2. Or $1000 additionally but the chance of getting it was only 50%
Participants chose the less risky option ( 1) .

Case 2:

People were given 2000$ in cash and told to chose between
  1. Losing 500$ for sure
  2. Taking risk which has 50-50 chance of losing $1000.
Participants chose more risky option (2) . This experiment showed that humans are indeed geared towards less risky, less uncertain future and also that people are more sensitive to losses then to gains. Probably this explains why people still live in difficult relationships, jobs that do not provide satisfaction and risky entrepreneurial ventures. It may also explain why people want to get instantly ingratiated( for e.g. using black hat SEO techniques to get more traffic to blogs, making unsavoury alliances to get more business and helping to increase corruption). It also tells us about the emotions that shape our thinking when we are dealing with real world. Looking at this it is very clear that being an entrepreneur when surrounded by non – risk takers is almost a leap of faith. Also some entrepreneurs may fail because they want to be called as entrepreneurs but still have not been able to overcome herd mentality which can bring long lasting success. How far such entrepreneurs last ? And how fast they rush back to security? I hope I got across the important points that prevent human beings from utilizing their talents and taking calculated risks. What do you think about the post ? Do comment and let me know .