Mostly, our herd conformity is a good thing and it’s one of the reasons that societies are able to function (legal system, driving, etc). Nevertheless, watch out for what you step into when you follow the herd.
Herd behavior occurs when investors follow the behavior of a larger group, even in situations which may be difficult to rationally justify the decisions of the group.
A classic example of herd behavior occurred in the late 1990s. Investors poured huge assets into stocks of young fresh Internet companies, even though many of them didn’t have any profit and were unlikely to generate significant revenues in the foreseeable future.
As this example is so long past and our memories so short, herds did the same in 2007/2008. Who knows, perhaps the herds are at it again right now.
There are many adverse consequences of herd behavior. They include high transaction costs which happen when everyone tries to keep pace with the latest trends….