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In: Economics

"The herd instinct among forecasters makes sheep look like independent thinkers." by Edgar R. Feidler Discuss...

"The herd instinct among forecasters makes sheep look like independent thinkers." by Edgar R. Feidler
Discuss this quotation in terms of foreign exchange rate determination.

Solutions

Expert Solution

This quotation in terms of foreign exchange rate determinationmeans that sentiment can be valuable when there is a need todetermine, analyze and evaluate trends that exist in the foreignexchange marketplace. But the quote suggests that while thesentiments can be useful for determining and evaluating trends itcan also lead to a downside. This happens when the consensusherds to one side. In case of herding of consensus with regardsto foreign exchange rate movements the herd is usually and in mostcases wrong.

When it comes to foreign exchange rate determination often manyanalysts and forecasters makes use of herd instinct by adhering tothe general consensus. They will predict the foreign exchange ratemovements in that direction which is being predicted by most otheranalysts. This is done without proper technical analysis andfundamental analysis. Such analysts often end up making wrongprediction and the foreign exchange rate movement as predicted bythem is usually far from accurate.


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