Herd mentality rules in financial crisis

Tue Sep 30, 2008 10:28am EDT
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By Maggie Fox, Health and Science Editor

WASHINGTON (Reuters) - Herd mentality rules during a financial crisis because people are wired to follow the crowd when times are uncertain, experts say.

Brain and behavior studies clearly show that when information is scarce and threats seem imminent, people often stop listening to their own logic and look to see what others are doing.

"People are afraid, and the reason they are afraid is there tremendous uncertainty right now in the markets," Gregory Berns, a neuroeconomist at Emory University in Atlanta who studies the biology of economic behavior, said in a telephone interview.

Berns puts people in magnetic resonance imaging or MRI scanners while he tests their responses to various scenarios, and studies patterns of their brain activation.

One clear pattern -- the brain's "fear center" lights up when people are uncertain.

"When people are presented with a situation where they don't have information or the information is ambiguous, we see activation of the amygdala and insula," Berns said in a telephone interview.

And people begin to doubt their own judgment.

Bern's team did an experiment in which they recruited actors and true volunteers. "One real subject went into a (MRI) scanner," he said.   Continued...

<p>Traders gather at the Bank of America kiosk on the floor of the New York Stock Exchange in New York, September 24, 2008. REUTERS/Brendan McDermid</p>