Herd Behavior

Herd behaviour is the tendency to do what others are doing. The harder a situation is to judge alone, the more readily the crowd's action is accepted as the correct answer.

Evolutionarily it was a sensible response: when everyone runs one way, running along before asking why was safer. The problem is that in markets the instinct works in reverse.

The point at which crowds pile in is usually after prices have already risen a great deal, and the point at which everyone flees is usually after they have already fallen. Following means buying dear and selling cheap.

Institutions are not immune. Being wrong alone brings blame while being wrong together diffuses it, so the incentive to stay close to the crowd is structural.

The way out is deciding before others do. Setting your principles while markets are quiet means that when everyone moves, you only have to follow what you already wrote. That said, the crowd is not always wrong. Simply doing the opposite is still letting others set your reference, so the decision has to rest on your own reasoning.