Herd Mentality

What is Herd Mentality Bias?

Herding is term used to describe behavior, very commonly used in behavioral economics. It suggests that human beings tend to operate in groups and are unwilling to go against the general consensus.

There have been many different theories surrounding herding, one of the most well known being cascading which says that all it takes is one well-informed investor to make a decision to cause all investors to follow him, on the assumption that he knows best.

An excellent example of herding is the 2008 sub-prime crisis. The assets backing CDOs were clearly extremely low quality, but because everyone was doing it, most investors decided to just buy them.


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