Behavioral Finance
What is Herd Behavior?
Herd behavior is the tendency to follow the crowd, buying when everyone is buying and selling when everyone is selling, even when private analysis suggests the opposite. The cognitive engine behind every bubble and crash from Tulips (1637) to dotcom (2000) to crypto cycles.
Formula
N/A, social/psychological dynamic. Often quantifiable via sentiment indicators (AAII Survey, Put/Call Ratio, fund flows).
How to Interpret
Warren Buffett: 'Be fearful when others are greedy, and greedy when others are fearful.' Watch fund-flow data, retail-investor sentiment surveys, and Google search trends for crowd-positioning signals. Herd behavior is amplified in the US by financial Twitter/X, CNBC, and Robinhood; in India by Telegram groups, YouTube tipsters, and WhatsApp forwards.
Typical Ranges
Contrarian indicators: extreme bullish AAII sentiment (>50%) or extreme bearish (<20%) often precede reversals.