This effect is evident when people do what others are doing instead of using their own information or making independent decisions. The idea of herding has a long history in philosophy and crowd psychology. It is particularly relevant in the domain of finance, where it has been discussed in relation to the collective irrationality of investors, including stock market bubbles (Banerjee, 1992). In other areas of decision making, such as politics, science, and popular culture, herd behavior is sometimes referred to as ‘information cascades’ (Bikhchandi et al., 1992). Herding behavior can be increased by various factors, such as fear (e.g. Economou et al., 2018), uncertainty (e.g. Lin, 2018), or a shared identity of decision makers (e.g. Berger et al., 2018).
Banerjee, A. (1992). A simple model of herd behavior. Quarterly Journal of Economics, 107, 797-817.
Berger, S., Feldhaus, C., & Ockenfels, A. (2018). A shared identity promotes herding in an information cascade game. Journal of the Economic Science Association, 4(1), 63-72.
Bikhchandi, S., Hirschleifer, D., & Welch, I. (1992). A theory of fads, fashion, custom and cultural change as informational cascades. Journal of Political Economy, 100, 992-1026.
Economou, F., Hassapis, C., & Philippas, N. (2018). Investors’ fear and herding in the stock market. Applied Economics, 50(34-35), 3654-3663.
Lin, M. C. (2018). The impact of aggregate uncertainty on herding in analysts’ stock recommendations. International Review of Financial Analysis, 57, 90-105.