Herd behavior (or herding) is the tendency to do what the crowd is doing — buying because everyone else is buying, selling because everyone else is selling — instead of judging the investment on its own merits. It feels safe, but in markets that instinct is often exactly backwards.
Herding is a documented driver of bubbles and crashes. When a stock or sector is soaring and every headline and forum is talking about it, the herd piles in — usually late, at prices already inflated by everyone who arrived first. When fear takes over, the same crowd stampedes for the exit together, pushing prices below what the businesses are worth. The herd is loudest and most confident precisely at the top and the bottom, which is why following it tends to mean buying high and selling low. Economists call the mechanism an informational cascade: each person assumes the people ahead of them did the homework, so no one actually does (Bikhchandani, Hirshleifer & Welch, 1992).
Example (illustrative): a stock triples over a few months on a story that is everywhere. You have no independent reason to own it, but watching others get rich is uncomfortable, so you buy near the peak. The story fades, the crowd rushes out, and you sell at a loss into the same stampede — a round-trip driven entirely by what other people were doing, not by the company.
Have a reason to own something that does not depend on the crowd, and write down in advance the price or condition that would prove you wrong — an invalidation level. When popular sentiment reaches an extreme, a contrarian reading of fear and greed can be more useful than the headline. Herding is closely tied to fear of missing out and recency bias — the crowd feels most right when the recent trend has been strongest.
It is the tendency to buy or sell because the crowd is doing so, rather than judging the investment on its own merits — the mechanism behind bubbles and crashes.
The crowd is loudest and most confident near tops and bottoms, so following it tends to mean buying high after a rally and selling low into a panic.
Own something for a reason that does not depend on the crowd, and write down in advance the price or condition that would prove your thesis wrong so you are not swept along by sentiment.
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Educational research only — not investment advice.