Yes and no. The relevant phrase here is "system dynamics" -- you might find that a fun area to dig into, next time you have some free time. It's one of the most interesting formalisms around, very broadly applicable but not all that well-known.
Keep in mind that most of these herd situations *start* with an entirely reasonable basis. For instance, in the most recent case, with concepts like "home ownership is good" and "we should do more to make it easier for people to own homes" and "if we spread the risk around, we reduce the odds than any one financial institution will fail". It was only when these ideas very, very gradually got carried to extremes that the situation started to get dangerous.
But the thing about herds is that they have a lot of inertia. Even though the situation is rationally kind of weird and scary (and a few people were predicting more or less this mess several years ago), the herd is very good at convincing itself that there is nothing dangerous going on, because nothing bad is currently happening. So the underlying situation just gets more and more dangerous, but on the surface it all seems to be okay.
So it all just keeps toddling along until something -- often something quite minor -- rocks the structure. This is called a "tipping point" in system dynamics: the point at which the system is so fragile that it really doesn't take much to change it. The longer things have continued unsustainably, and the more fragile the edifice, the less it takes to knock it over.
*Eventually*, something happens, though. In this particular case, it was the start of the ARM disaster -- adjustable-rate mortgages starting to "reset" to higher interest rates, which set off an initially small but growing wave of foreclosures. That caused house prices to fall, which caused banks to weaken, which caused credit to tighten, and before long the herd has gone from "It's a little problem" to "this is kind of worrying" to "OMIGODTHESKYISFALLING!!!!!!!".
Note that the reaction *was* in the correct direction: it's just that the herd has run right on past the rational new state and kept on moving, with the panic building on itself. This is particularly bad in market economics, because the market is built entirely on trust, and nobody trusts the market or each other at all at the moment. This is why government actions are so heavily focused on trying to inject *stability* right now, because stability breeds trust.
But really: it's useful to think of it as a herd of buffalo trying to follow the moving target of What Makes Sense. When the herd is stopped, it stays grazing in one place for a long time, even while What Makes Sense is moving further and further away. Eventually, a few of them start to move in the right direction again, and ever-so-slowly the group starts to notice and run in that direction. But once the whole thing is moving, it has such unstoppable momentum that it tends to move way past the current position of What Makes Sense before it begins to slow down and graze again, often in a position that is just as irrational as the one it started in...
no subject
Keep in mind that most of these herd situations *start* with an entirely reasonable basis. For instance, in the most recent case, with concepts like "home ownership is good" and "we should do more to make it easier for people to own homes" and "if we spread the risk around, we reduce the odds than any one financial institution will fail". It was only when these ideas very, very gradually got carried to extremes that the situation started to get dangerous.
But the thing about herds is that they have a lot of inertia. Even though the situation is rationally kind of weird and scary (and a few people were predicting more or less this mess several years ago), the herd is very good at convincing itself that there is nothing dangerous going on, because nothing bad is currently happening. So the underlying situation just gets more and more dangerous, but on the surface it all seems to be okay.
So it all just keeps toddling along until something -- often something quite minor -- rocks the structure. This is called a "tipping point" in system dynamics: the point at which the system is so fragile that it really doesn't take much to change it. The longer things have continued unsustainably, and the more fragile the edifice, the less it takes to knock it over.
*Eventually*, something happens, though. In this particular case, it was the start of the ARM disaster -- adjustable-rate mortgages starting to "reset" to higher interest rates, which set off an initially small but growing wave of foreclosures. That caused house prices to fall, which caused banks to weaken, which caused credit to tighten, and before long the herd has gone from "It's a little problem" to "this is kind of worrying" to "OMIGODTHESKYISFALLING!!!!!!!".
Note that the reaction *was* in the correct direction: it's just that the herd has run right on past the rational new state and kept on moving, with the panic building on itself. This is particularly bad in market economics, because the market is built entirely on trust, and nobody trusts the market or each other at all at the moment. This is why government actions are so heavily focused on trying to inject *stability* right now, because stability breeds trust.
But really: it's useful to think of it as a herd of buffalo trying to follow the moving target of What Makes Sense. When the herd is stopped, it stays grazing in one place for a long time, even while What Makes Sense is moving further and further away. Eventually, a few of them start to move in the right direction again, and ever-so-slowly the group starts to notice and run in that direction. But once the whole thing is moving, it has such unstoppable momentum that it tends to move way past the current position of What Makes Sense before it begins to slow down and graze again, often in a position that is just as irrational as the one it started in...