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Psychological Drivers 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 is fundamentally based on psychological processes that supersede rational decision-making, resulting in market inefficiencies, speculative bubbles, and economic disasters. This chapter analyses the fundamental psychological motivators of herding, highlighting how emotions such as anxiety, greed, and the fear of missing out influence investor behaviour. Fear, often instigated by ambiguity and adverse market indicators, leads to panic selling and a systemic financial decline. Greed drives speculative excess, promoting risk-seeking behaviour that exacerbates asset bubbles. The fear of missing out, intensified by social influence and digital media, drives hasty investment choices that lack adequate examination. This chapter combines historical and contemporary case studies to demonstrate these emotional triggers, ranging from previous financial crises to current digital trading occurrences. By understanding these psychological motivators, investors and regulators can develop strategies to mitigate the adverse effects of emotion-driven herding, thereby promoting more stable markets and informed financial decision-making.

Suggested Citation

  • Kok Loang Ooi & Norazlin Binti Ab Aziz & Wee Yeap Lau, 2025. "Psychological Drivers of Herding," Springer Books, in: Following the Crowd: Psychological Drivers of Herding and Market Overreaction, chapter 0, pages 57-68, Springer.
    • Handle: RePEc:spr:sprchp:978-981-95-0792-4_4
    DOI: 10.1007/978-981-95-0792-4_4
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