The danger of the herd

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” — Charles Mackay

Some readers will remember the golden period in and around the millennium when the majority in government, in regulation, and in the financial services industry were convinced of the virtues of “light-touch regulation” which had done so much to encourage innovation in New York, Frankfurt, London and elsewhere. Everyone, it appeared, believed that off-balance sheet borrowing, and the creation of CDOs, and other abstruse financial instruments had removed risk from lending, most particularly to sub-prime borrowers. The average annual return on banking had risen to 16%. What could possibly go wrong?

Groupthink is the unquestioning acceptance of possibly wrong answers simply because it is socially painful to disagree

Well… not everyone, in fact, was convinced. There were in fact a good number of perceptive commentators who did their best to warn of the forthcoming catastrophe — the 2008 financial crisis. But no-one in power took any notice for they had succumbed to one of the more common psychological problems, often called “group-think” and “herd behaviour”.

Group-think, sadly, is pervasive. It is essentially the unquestioning acceptance of possibly wrong answers simply because it is socially painful to disagree. It is particularly common in large organisations because they, of course, require a good deal of conformity. You can’t have every single person asking questions. Decisions have to be made and implemented. And if everyone you know, every newspaper you read, every person you once admired, are all saying the same thing, it takes a real effort of will, and real courage, to argue back.

So it becomes uncomfortable to be a contrarian. Indeed, dissent can lead to the dissenter becoming the subject of personal and sometimes humiliating attack. Such attacks are, by their nature, seldom reported, not least because the victim will be cowed into silence. But Camilla Cavendish, former head of the Downing Street Policy Unit under Prime Minister David Cameron, told the Today Programme in December 2016 that some officials “became very, very angry and took it viscerally personally” when it was suggested that there might have been a better way of negotiating with the rest of the EU in advance of the 2016 Brexit referendum. Questioning their strategy was perceived by them as questioning their commitment.

Margaret Heffernan offers another interesting — almost hilarious — analysis of group-think in her excellent book Wilful Blindness.

“I’ve even heard boards discuss how, and why, they are invulnerable to groupthink, oblivious to the irony inherent in their confidence. (…) Dennis Stevenson, then chairman of HBOS, eulogised the outstanding board he chaired [at a time when] everyone knew the bank teetered on the edge of collapse. (…) [Lord Stevenson cited as evidence] the fact that, even in this crisis, ‘we are as one’. He seemed oblivious to the notion that the unity of his board may have been a contributory factor to the bank’s mess in the first place.”

Herd behaviour is not quite the same as group-think, and it is not always irrational. Anyone who succumbs to group-thought has stopped thinking for themselves. But herds often run together for a good reason, to avoid danger or to take advantage of a limited opportunity. There is, after all, nothing irrational about humans seeking to watch and learn from what others are doing. Rational investors in an efficient market will, for instance, produce frenzies and crashes from time to time.

The investor example shows that herds — like groups of colleagues — can also get it badly wrong, running too fast and too blindly into danger rather than away from it. Policymakers must, therefore, hold tight to the ability to think for themselves. They should not let their colleagues override their doubts and fail to properly analyse alternative courses of action. And, whilst they might sensibly follow a herd for a little while, they should as soon as possible start evaluating situations for themselves and, if necessary, get out of the herd before it is too late.

Diffuse Responsibility

Large organisations — and indeed whole industries — face another set of problems caused by the fact that knowledge of, and/or responsibility for, problems is often widely shared. In consequence, it is then often the case that no-one feels responsible for addressing or even highlighting the problem.

One example was the poor maintenance and terrible safety record at BP’s Texas City Refinery, where an explosion in 2005 killed 15 and injured over 170 more. The problems were readily apparent to most employees and managers but — partly under pressure to save money — no-one felt responsible for doing anything about them.

Much the same was true of American financier Bernie Madoff’s Ponzi scheme. A good many financial professionals had worked out that something fishy was going on, but none of them saw any need to do anything more than avoid dealing with him.

The diffusion of responsibility is exacerbated if there are frequent changes in management. This, too, was part of the problem at Texas City as the over-worked operatives “close to the valve” stayed put, whilst their managers generally moved on very rapidly, away from an old refinery which lacked the prestige of many of BP’s other locations. Managers were not therefore in post long enough to both understand the issues and then have the time and inclination to do much about them.

Policymakers should cherish those who question the assumptions, beliefs and behaviour of those in power

There are signs that diffuse responsibility will prove to have been a significant factor in causing the Grenfell Tower tragedy. Was the local authority, or the Tenant Management Organisation, responsible for ensuring the safety of residents? And the architects, designers, surveyors, suppliers and regulators are all arguing that it wasn’t their job to ensure that the cladding wouldn’t catch fire.

Lessons for policymakers

From this we can draw four lessons for policymakers and regulators.

First, they must themselves avoid getting caught up in group-think. They should remain alert, questioning and a little cynical, even if their questions are ridiculed by senior figures.

Second, they should cherish those who question the assumptions, beliefs and behaviour of those in power. Mavericks and dissenters may be more often wrong than right, but they should be taken seriously if their views seem to be based on real facts and perceptive analysis.

Third, governments and regulators are responsible for developing sufficient and effective tools to ensure that herds do not crash over cliffs and take lots of innocent (customer/taxpayer) victims with them.

Last, and far from least, they should ensure that regulated organisations take full responsibility for the consequences of their behaviour, and do not seek an easy and inexpensive life by assuming that potential problems are identified and addressed by others.