Herding
Also known as: Herd behavior
Investors imitate the crowd instead of acting on their own information.
What it means
In financial markets, the tendency of investors and analysts to converge on the same trades by mimicking others rather than trusting their private signals. It can be rational — when following others is informative, or when professionals avoid the career risk of deviating from peers — or driven by social conformity and information cascades. Herding pushes prices away from fundamentals, amplifies volatility, and inflates bubbles and crashes. It matters because correlated behavior turns individual biases into market-wide swings and helps explain why mispricing can grow rather than correct.
Examples
Fund managers all crowd into the same hot sector for fear of underperforming rivals, inflating it until it bursts.
Retail buyers pile into a stock because the chart is climbing and everyone is talking about it, not because anyone has read the accounts — the buying itself becomes the reason to buy.
A bank run needs no bad news: seeing a queue outside the branch, savers who still believe the bank is sound join it anyway, because being last in line is the real risk.
First described in Scharfstein & Stein (1990); Bikhchandani & Sharma (2001).