Herd Behaviour: Why Markets Boom and Bust
People copy others when uncertain. In markets, that can push prices far from fundamentals.
By Felix Narayan | Oct 16, 2026 | 7 min
Herd behaviour is the tendency to follow what others are doing rather than relying on your own information. It is often sensible: if a restaurant is busy, it is probably good.
In financial markets, however, herding can amplify bubbles and crashes.
I Why people herd
- — Information — others might know something you do not
- — Reputation — fund managers fear underperforming peers more than being wrong together
- — Social pressure and fear of missing out
- — Limited time to research every decision
II Information cascades
Economists describe “information cascades”, where people ignore their own signals and copy the choices of earlier people. Once a cascade starts, new information can be drowned out, and a small early trend can become a stampede.
III Historical examples
Episodes often cited include the Dutch tulip mania of the 1630s, the dot-com bubble around 2000, and the US housing boom before the 2007–08 financial crisis. In each, rising prices drew in more buyers who expected prices to keep rising, until sentiment reversed.
IV What it means for individuals
Investors who chase whatever has recently gone up tend to buy high and sell low. A written plan, regular investing on a schedule, and diversification help reduce the pull of the crowd. This is general information, not financial advice.
This is general educational information about economics, not financial, investment, or tax advice. Consult a qualified, licensed professional before making financial decisions.
Further reading
- 1. The Framing Effect: Why “90% Survival” Beats “10% Mortality”
- 2. Present Bias: Why We Choose Now Over Later
- 3. The Anchoring Effect: Why the First Number Sticks