Herd Mentality

The tendency of investors and managers to imitate the crowd rather than reason independently — a recurring target in the Berkshire Hathaway Annual Letters, which Kyle read and tagged at the point where Warren Buffett describes how bubbles form. Buffett’s framing: in both the Internet-stock and housing bubbles, “an army of originally skeptical investors succumbed to the ‘proof’ delivered by the market,” the pool of buyers expanded “to keep the bandwagon rolling,” and bubbles “blown large enough inevitably pop,” confirming the proverb “What the wise man does in the beginning, the fool does in the end.”

The letters return to the same idea through several images. Buffett likens auction-market participants to “an army of manic-depressive lemmings,” and twice invokes the lemming as the emblem of conventional cowardice — citing John Maynard Keynes that “it is better for reputation to fail conventionally than to succeed unconventionally,” and noting that managers face a “personal gain/loss ratio” that rewards “failing conventionally.” He names the underlying force the institutional imperative: among its symptoms, “the behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.” Buffett positions Berkshire’s owner-operator structure — he and Charlie Munger holding a large stake and unworried about being fired — as the immunity that lets them “behave with Berkshire’s money as we would with our own” and act unconventionally.

Context: “Herd mentality” (or herd behavior) is a well-documented bias in behavioral finance and social psychology in which individuals follow the actions of a larger group, often against their own analysis, contributing to asset bubbles and crashes.

Where this appears

• Berkshire Hathaway Annual Letters — tagged on Buffett’s account of how Internet-stock and housing bubbles inflate via crowd-following; reinforced by his “manic-depressive lemmings,” “institutional imperative,” and Keynes-on-conventional-failure passages.