The Hindu Business Line : <I>Werther effect </I>

My friend's neighbour has, in the last six months, invested heavily in the oil sector, especially in the companies located in Alberta. The reason? He read reports that oil prices are likely to remain high and that all professional managers believe that the sector will generate high returns in the next two years.

Think about it. As more people buy oil stocks, its prices will go up sharply till one day everybody thinks the sector is "overvalued." And that would be the beginning of the decline of oil stocks. The neighbour's behaviour to imitate the actions of money managers and other investors is not different from a similar behaviour documented in sociology. It is called the Werther effect.

Johann Wolfgang von Goethe wrote a very popular book The Sorrows of Young Werther in the 1770s. The book is about a young man who kills himself, having been depressed about failed love. The book prompted many young men in Germany to imitate the Werther suicide.

David Phillips, a sociologist, coined the term "Werther effect." His studies, since the 1970s, showed that a well-publicised suicide led to an increase in suicides in the general population. Similarly, people are more likely to exhibit aggressive behaviour after watching a violent movie.

The Werther effect refers to mimicking highly publicised destructive behaviour, but can be extended to attention-grabbing actions.

The neighbour wanted to imitate many others who were investing in the oil sector. His behaviour exemplifies that of a momentum trader. Such people attempt to catch on to a trend in the market — the Werthers, if you can call them that!

(The author is based in Ontario, Canada)

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