◐ Behavioral
◆ The PatternFollowing the crowd's actions rather than your own analysis.
Herd behavior — following the crowd's actions regardless of your own analysis.
Why we herd:
• Evolutionary: safety in numbers (wildebeest at the river)
• Informational: "They must know something I don't"
• Social: fear of standing out, career risk ("no one got fired for buying IBM")
Market impact: Creates momentum that overshoots fair value in both directions
• Evolutionary: safety in numbers (wildebeest at the river)
• Informational: "They must know something I don't"
• Social: fear of standing out, career risk ("no one got fired for buying IBM")
Market impact: Creates momentum that overshoots fair value in both directions
Keynes: "It is better for reputation to fail conventionally than to succeed unconventionally."
Pattern bridge: Following the crowd is a collective reward signal — the market’s version of RLHF. In statistics, it produces spurious correlation as everyone moves together.
When to use this
✓ Use when: You notice everyone around you talking about the same trade. Social media is flooded with one-directional conviction. Volume spikes massively with no fundamental catalyst. A contrarian position has become very painful.
✗ Skip when: The "herd" is responding to genuine fundamental changes (earnings beat, regulatory approval). Early in a trend — herding is most dangerous at extremes, not at the start. In highly efficient markets (large-cap liquid stocks) where herding is arbitraged away quickly.