Advisor Insights

How Herding Leads to Market Bubbles

Michael Pompian

This is the fourth the Behavioral Finance and Macroeconomics series. We will explore the effect behavior has on markets and the economy as a whole--and how advisors who understand this relationship can work more effectively with their clients. (Access previous articles here.)

In the previous article, we discussed the shortcomings of a concept in traditional economics called Homo economicus or Rational Economic Man. We reviewed the idea that humans act irrationally, and that irrational behavior can trigger market bubbles, recessions and crashes. Today we'll discuss how the behavior of herding can lead to speculative bubbles.