Most marketing theory is based on the idea that people are logical creatures. At one point in the purchase decision process, people will take careful account of all available information before making the final decision. There is growing evidence that this is not the case. (to get more in-depth look at Herd behavior and how you should adjust our marketing, read Mark Earls’ ‘How to Change Mass Behavior by Harnessing our True Nature’. A must for marketers.)
“Suppose that a group of individuals must make an important decision, based on useful but incomplete information. Each one of them has received some information relevant to the decision, but the information is incomplete and “noisy” and does not always point to the right conclusion.
Let’s update the example to apply it to the recent bubble: The individuals in the group must each decide whether real estate is a terrific investment and whether to buy some property. Suppose that there is a 60 percent probability that any one person’s information will lead to the right decision.
In other words, that person’s information is useful but not definitive — and not clear enough to make a firm judgment about something as momentous as a market bubble. Perhaps that is how Mr. Greenspan assessed the probability that he could make an accurate judgment about the stock market bubble.
The theory helps explain why he — or anyone trying to verify the existence of a market bubble — may have squelched his own judgment.
The fundamental problem is that the information obtained by any individual — even one as well-placed as the chairman of the Federal Reserve — is bound to be incomplete. If people could somehow hold a national town meeting and share their independent information, they would have the opportunity to see the full weight of the evidence. Any individual errors would be averaged out, and the participants would collectively reach the correct decision.”
Let’s look a typical purchase decision: You are in the market for a laptop. You’ve always had a PC but you are delighted by your iPhone and iPod experience. You have trepidations switching from PC to Mac – the learning curve worries you. But you hear Vista is not the best operating system ever. What to do? You scan the CNET’s, PC World’s of the world. The information gets more confusing. So you start to ask around: The Mac cultists, the PC nerds, friends using Vista on a new laptop, friends that switched from PC to Mac. And you scan message boards, social networks and other independent point of views. That’s how you form your opinion: through personal opinions, half-truths and emotionally charged point of views.
In general, herd behavior happens for two reasons: Social pressure of conformity and the perception that large groups can’t be wrong. Businesses need to focus on the latter. Interjecting reason and facts into a conversation can change the discussion considerably. Individuals might have that nagging feeling that the large group is wrong but they still follow the herd: Humans often fall into the trap that large groups know something they don’t. And that’s the opportunity most businesses miss out on:
Does Vista really suck? Is it really slow? The majority says so. I haven’t tried it yet. All I know is from people that told me that they would rather have XP back. Instead of hiring new agencies to sell the public on Vista, Microsoft should invest their money on social media outreach and Conversational Marketing efforts to listen, learn, respond and change.
Companies who learn how to have a conversations and empower their fans to spread the word will be able to fight the ‘Information Cascades Effect’. When people engage other people in conversations about products, they know that they’re dealing with subjective opinions. They will be open and ready to listen and respond to companies who engage them with facts, not marketing blubber. Consider Conversational Marketing as a daily town meeting about your product and business.