Definition
Herding is the tendency of investors to follow and copy what other investors are doing, often leading to bubble formation and market inefficiencies. People herd due to fear of missing out (FOMO), assumption that others know something they don't, or social pressure. Herding amplifies market movements - both bubbles and crashes. While following trends can be profitable in momentum strategies, herding often leads to buying high and selling low. Contrarian investors specifically bet against herd behavior.
Example
During the 2021 meme stock frenzy, millions of retail investors piled into GameStop and AMC based on social media momentum rather than fundamentals. The subsequent crashes hurt those who bought near peaks driven by FOMO.
FAQ
What is Herding?
Following the crowd's investment decisions rather than independent analysis.
Why is Herding important?
Herding helps investors evaluate behavioral finance and make more informed decisions.