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The Psychology of Herding

In: Following the Crowd: Psychological Drivers of Herding and Market Overreaction

Author

Listed:
  • Kok Loang Ooi

    (Universiti Malaysia)

  • Norazlin Binti Ab Aziz

    (Universiti Malaysia)

  • Wee Yeap Lau

    (Universiti Malaysia)

Abstract

Herding behaviour in financial markets refers to investors’ collective tendency to imitate the actions of others, often leading to market inefficiencies, speculative bubbles, and economic disasters. This chapter examines the psychological underpinnings of herding and highlights the influence of social proof and conformity on financial decision-making. This chapter elucidates how cognitive and social variables influence herd behaviour, drawing on Solomon Asch’s conformity studies, Robert Shiller’s concept of irrational exuberance, and Amos Tversky’s theory of heuristics and biases. The analysis of historical and current instances underscores the significance of herding in today’s financial markets, where digital platforms and algorithmic trading have intensified collective decision-making tendencies. Comprehending the psychological foundations of herding is essential for investors, regulators, and financial institutions to mitigate the risks associated with pervasive market behavioural biases.

Suggested Citation

  • Kok Loang Ooi & Norazlin Binti Ab Aziz & Wee Yeap Lau, 2025. "The Psychology of Herding," Springer Books, in: Following the Crowd: Psychological Drivers of Herding and Market Overreaction, chapter 0, pages 1-22, Springer.
    • Handle: RePEc:spr:sprchp:978-981-95-0792-4_1
    DOI: 10.1007/978-981-95-0792-4_1
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