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We were familiar with the business technology magazine Red Herring and figured their web site might offer the origin of the peculiar term. After a bit of searching, we did manage to uncover an explanation. According to the site, British fugitives in the 1800s would rub a herring across their trail, thereby diverting the bloodhounds that were hot in pursuit. In the 1920s, American investment bankers started calling preliminary prospectuses "red herrings" as a warning to investors that the documents were not complete or final and could be misleading. We liked the explanation, but wondered if there was more to the story. We spent some time searching and uncovered
an alternate explanation, centered on hunting. The Word Detective explains that the curing process turns the fish a red color and lends it a distinctive smell. The fish was tied to a string and dragged through the woods to teach hunting dogs to follow a trail. Later, red herrings may also have been used to confuse the hounds in order to prolong a foxhunt or to test their ability to stay with a scent. Another handy etymology source, Wilton's Word and Phrase Origins offers a similar explanation, but attributes the use of the herring to poachers, who used the scent to throw the dogs off the trail of game so they could claim the prize for themselves.
It seems that whether the prey was a fugitive or a fox, this pungent fish did the trick and distracted the dogs.
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