Definition
Herding drives investors to buy what others are buying and sell what others are selling, regardless of fundamentals. This creates momentum in the short term but eventually leads to bubbles (buying herding) and crashes (selling herding). Institutional herding occurs when fund managers cluster in the same positions to avoid career risk from underperforming peers.
lightbulb Example
During the 2021 meme stock frenzy, millions of retail investors piled into GameStop and AMC because others were buying, creating a self-reinforcing buying frenzy. Many who bought near the peak suffered 80%+ losses when the herd reversed.
verified_user Key Points
- Following the crowd rather than independent analysis
- Creates momentum, bubbles, and crashes
- Career risk drives institutional herding
- Social media amplifies herding behavior