Think twice before jumping on the investing hype train, writes professor Eric Kirzner. It's likely just a bubble waiting to burst
Herd behavior can have both positive and negative effects, depending on the situation.
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Mob mentality. Groupthink. Pack behaviour. General strikes. Sports events. All are forms of ‘herd behaviour’, which occurs whenever a large number of unconnected people act in the same way at the same time—sometimes with direction from others, sometimes not. Fuelled by fear, greed or a desire to be part of a particular group, individual judgment and opinion-forming processes shut down as people automatically follow the group's behaviour.
Herd behavior can have both positive and negative effects, depending on the situation. For example, it can lead to increased efficiency and safety in a group. But it can also cause people to make irrational or dangerous decisions. In the realm of investing, herding results when investors copy the behavior of other investors. And like many forms of herd behaviour, the results can be catastrophic.
[This article has been reprinted, with permission, from Rotman Management, the magazine of the University of Toronto's Rotman School of Management]