"I don't remember what the women wore," Lou Gerstner recalled, after his first meeting with top management as chief executive at IBM, "but it was very obvious that all the men in the room were wearing white shirts, except me. Mine was blue, a major departure for an IBM executive!"

When the same group met next, Gerstner wore a white shirt as a way of fitting into the company culture. And all his subordinates showed up in colors.

Though we pride ourselves on rugged individualism, most human beings are deeply conformist. In stock-market parlance, we tend to be trend followers, not trend leaders. Even stock analysts, who ostensibly get paid for independent thinking, generally echo the opinions of other analysts -- and often end up doing no better than guesswork at predicting prices.

So what's going on in our minds when we follow the herd? When is it a promising strategy? When is it just foolish? And how can we get some control over a behavior that comes so naturally? Video: Should you use your animal instinct?

Imitating the people around us is one of our most basic biological drives. Infants begin mimicking facial expressions within one hour after birth, and we go on for the rest of our lives imitating words, faces, body language, speech patterns, social fads, fashions -- and investments -- until we die. We have "mirror neurons" in our brains to help us do what everybody else is doing. But why?

We want to be like other people partly because it's a way to fit in and form a group identity, like Gerstner putting on the white shirt at IBM. And it's a product of our innate urge to emulate leaders, like the IBM executives switching to Gerstner's color. Doing what everybody else does can also be an effective defensive strategy. Animals form such tight groups, according to the "selfish herd" theory, because everybody's trying to keep at least one body between himself and the wolf. Video: Following the herd into danger

Imitating others can also serve as a shortcut to success. Consider a familiar rule of road warriors: Never stop at a diner with an empty parking lot. We treat parked cars and the inconvenience of a crowd as evidence that the food is worth waiting for (or at least that nobody has died there lately from E. coli).

We are particularly prone to herd behavior, says Lin Peng, a finance professor at the City University of New York's Baruch College, when our attention is limited -- either because we have too little time and information or, as often happens in the stock market, because there's too much information to process efficiently.

One frequent shortcut for investors is to use momentum investing, buying recent winners and selling recent losers. Another common strategy is to pay

attention to industries or sectors instead of individual companies. That can lead to what Peng politely calls "excess co-movements." Think panicky herd.

For instance, during the Internet mania of 1995-2001, a Purdue University study said companies could get a 53% bump in their stock price simply by switching to a dot-com name -- from Widget Inc. to Widget.com, for instance. The herd was so blindly hungry for Internet stocks that the price of one small company, NEI Webworld, rose almost 1,170% in a day simply because it made news for its involvement in an Internet scam -- and the company was already in bankruptcy.

Another company got a 30% boost when it switched its name from Mecklermedia to Internet.com in 1998 -- and then a 54% boost when it dropped the tainted dot-com name in April 2001, becoming INT Media. The CEO readily admitted that "nothing ever changed" about the company, except its name and its stock price. (The company later changed its name again, to Jupitermedia.) Audio: Dot-com madness

For individual investors, it's "very difficult to make money" by running with the herd, says Ivo Welch, who studies market movements at Brown University. Apart from what happened during the dot-com madness, herd behavior doesn't usually have much effect on price, particularly not for big stocks such as General Electric or IBM.

Herd movements are also notoriously difficult to predict and even harder to act on. During the Internet bubble, people commonly told themselves that they'd be the ones to get out in time. But big profits trigger an appetite for bigger profits and a disregard for risks. So when the excess co-movements became a stampede, those investors generally got flattened with everybody else.

Experts say the risk of herd movements is greatest with small companies, initial public offerings and some emerging economies, where information is insufficient or subject to manipulation. But even when herd behavior doesn't move markets, it can pose a threat to individual investors. It's a herd move when people buy hot stocks because that's what the neighbors are doing. It's a herd move when they over-invest in the company where they work, because it's "disloyal" to sell company stock. And it's a herd move when people pile money into last year's top mutual funds. Those funds often stand out because they are extremely volatile. So the herd buys high on the blowout year and often sells low (and remorseful) during the subsequent years in the dumps.

Going against the herd can be extraordinarily difficult. Individual investors typically don't have enough time for independent research. And professionals risk their

reputations if they stand up against the crowd. Is it worth it? Usually the answer is yes.

As the financial fraud at Enron began to unravel in April 2001, CEO Jeff Skilling dodged a critical question from hedge-fund manager Richard Grubman during a conference call. So Grubman upped the challenge, complaining that Enron was the only company that couldn't produce basic financial data before a conference call.

"Well, thank you very much," Skilling shot back. "We appreciate that. A--hole."

A stunned silence followed the obscenity. Stock analysts who had been muttering "buy, buy" like well-tended sheep suddenly snapped awake to the idea that they might be on their way to the slaughterhouse. In the ensuing reality check, Enron's stock plunged. It was bad news for the herd but not for Grubman, who had done his homework and made a large bet that Enron was about to tank.

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Published Jan. 25, 2008