The tendency to follow the crowd in investment decisions — buying what others are buying, selling what others are selling — to reduce the social risk of being wrong alone.
Deeper Explanation
Herding is rational for individual participants (career risk of being wrong alone) but collectively irrational (it drives prices away from fair value). Fund managers are especially susceptible: owning a consensus stock that declines creates less career damage than owning a contrarian stock that declines. This produces a "closet indexing" phenomenon where supposedly active managers hold portfolios that closely resemble the index. For individual investors, the correction is recognising that popularity and quality are different things — the best bargains are typically where the crowd is not looking.
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