Australian Shepherd mix - nipping at heels, going after strangers on walks

Question
I have a question. We recently adopted a golden retriever - australian
shepherd mix. She is about 8 - 9 months old and we've had her for 2 months.
She is house trained, sits, lays down, stays - completely well behaved in the
house and i even bring her to my office. However, recently more than ever
she has been misbehaving when we walk her outside. We keep her on a tight
leash close to us and are working on teaching her to heel- she is learning.
She seems to make progress unless people are walking by, running by or
riding a bike. She lunges after them and we do our best to control her or pull
her away from the sidewalk before people come by. She looks as if she is
trying to nip at people's heels, but she doesn't growl or bark- she just gets extremely excited but doesn't seem aggressive. In the process of learning her
problems in walking(we are now trying to avoid people going by) she nipped
at a boys shorts (but didn't touch his skin) as he walked by and lunged after a
bicycle causing him to lose his balance. Is this a herding quality of shepherds
and how do we break it? This is making us nervous because she is prefect
indoors and friendly with everyone, plays well with other dogs- just when
we're walking she goes after people but it doesn't seem like she's trying to be aggressive or malicious. Please help!

Answer
The australian shepherd is a HERDING breed with STRONG genetic control responses.  That's what you're seeing.

Teaching a dog to walk at heel requires a non stimulating environment with repetitive and predictable stimuli...the STREET does not do it.  You're effectively creating an inhibited response to the command "heel" when the dog's basic instincts say "CHASE" and "CONTROL".  Soon, your heel exercise will be rendered totally and permanently useless.

Put a Halti on this dog,along with her regular collar and leash.  Do NOT lead her by the nose.  Rather, use the Halti to change her direction with a reward based command you teach her separately ("Come along".)  Walking in low stimulus areas, say come along, change direction rapidly, and pop a special treat in her mouth when she obliges.  Repeat this randomly.  Because you're fighting her natural genetic response, this exercise needs to be repeated in slowly more stimulating environments ONLY when you have 100% compliance in the prior environment EVERY TIME (ten out of ten.)  Meanwhile, use the Halti to change direction; walk in a tight circle, then do a figure eight, all the time encouraging the dog verbally.  When you see the prey drive (which is what herding is based on) no longer is activated, ask her to "sit" and heavily reward her.  Then continue on.  Repeat this every time her prey drive kicks in: the circle, the figure eight, observing her body language, asking her to sit when she's calm and heavily rewarding.  Once you have a rock solid "come along" you can add that to your repertory.  Using Halti, say "come along" (her conditioned response will kick in and you should see her anticipating food reward, give her a handful), then circle, figure eight, sit, reward.  You'll never be able to totally extinguish that prey drive but you will be able to redirect it.