Herding

Taking a position mainly because many others are taking it, treating the crowd's activity as though it were evidence about value.

Example

Money flows into a sector faster as it rises and out faster as it falls, so the average participant's timing ends up set by the crowd rather than by any valuation.

Important

Herding is comfortable for the individual and destabilising in aggregate - being wrong alongside everyone else carries far less social cost than being wrong alone, which is exactly why crowded positions get crowded.

Related terms

• FOMO (fear of missing out) — Buying because other people appear to be making money, rather than because you have formed a view about what the asset is worth.
• Variant perception — A view that differs from what the market price already reflects, in a specific way you could check.
• Speculation — Putting money at risk on an outcome you cannot analyse with any real confidence, hoping for a large payoff.

Lessons that explain it

• Buying the story — A good narrative is not evidence, and it is the most reliable way to end up paying a price that only works if the story is much better than it says. (8 min)
• The committee's job is to break the memo, not approve it — An investment committee that never says no has stopped being a check on anything. The difference between a real pressure test and a rubber stamp is almost never visible from the approval rate alone. (13 min)
• Thinking independently — Returns above average require a view that differs from the average and turns out to be right. Everything in this lesson is about making that possible without it becoming mere contrarianism. (12 min)

All 578 terms in the Investing glossary