Herd behavior.
In plain English
Herd behavior is the tendency to do what everyone else is doing rather than act on your own information. Banerjee modeled it in 1992: it can be individually rational to copy the crowd, on the assumption that others know something, yet the result is a herd that ignores useful private information and can stampede in the wrong direction. In markets it drives bubbles, as people pile into a rising asset because others are, and panics, as they rush the exits together. The crowd's direction becomes the reason to move, regardless of the underlying value.
01Why it matters
Herd behavior inflates bubbles and deepens crashes, so recognizing the pull to follow the crowd helps an investor check a decision against the actual value rather than the direction everyone is running.
02The math, step by step
An asset keeps climbing and coverage of people getting rich spreads, so more pile in because others are, pushing the price further from any fundamental value. When sentiment turns, the same herd rushes to sell at once, and the move down feeds on itself.
03What this is NOT
It is not the same as widely accepted good practice. Broad diversified investing is popular because it works. Herd behavior is chasing a move because others are chasing it, without regard to value, which is what turns into bubbles and panics.
04Receipts
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