Why do we herd ?
- We (not just individuals but fund managers) follow investment advise of the same big shots.
- We observe other people's decision and emulate.
- We read the same news and reach similar conclusions (mostly).
- and more.
It has to do with psychology, sociology and randomness. I am yet to see a mathematical theory that will solve this problem. It would be Nobel worthy. Meantime, when you make the next investment decision, think twice, about how other might behave... ...
Note, some practical advice were offered by Nassim Nicholas Taleb.
Update, economists study this phenomenon under the name Information Cascade.
Post a Comment