Answer: It is the tendency to follow the actions of others.
People believe they act independently.
However:
👉 Others’ behavior influences decisions
When many move together:
👉 It appears correct
■ Essence
People tend to follow the majority.
How Does Herd Behavior Work in Financial Markets?
Answer: Collective action pushes prices further in the same direction.
When prices rise:
👉 Information spreads
👉 Participation increases
People hear:
👉 “Markets are rising.”
They join.
More participants:
👉 Stronger movement
■ Essence
More participants amplify price movements.
How Does Herd Behavior Affect Prices?
Answer: Prices can exceed fundamental value.
When many buy:
👉 Demand increases
👉 Prices rise
But:
👉 Value does not always justify price
Expectations dominate.
■ Essence
Collective behavior can detach price from value.
What Happens to Herd Behavior When Markets Fall?
Answer: Selling also spreads rapidly.
When decline begins:
👉 Fear appears
👉 Selling starts
Others observe:
👉 Follow selling
This accelerates decline.
■ Essence
Herd behavior works in both rising and falling markets.
Is This Phenomenon Rare?
Answer: No. It occurs repeatedly.
History shows patterns.
👉 Bubbles
👉 Crashes
These repeat.
Behavior remains similar.
■ Essence
Herd behavior is a recurring feature of markets.
● Conclusion
Answer: The majority is not always correct.
Following others feels natural.
But:
👉 Majority ≠ correctness
Understanding this is essential.
■ Essence
Independent thinking is necessary in investing.
👉 In this sense, investing is not only influenced by individual decisions—it is shaped by the collective behavior of many people acting together.