Herd Behavior and Investment

David Scharfstein and Jeremy Stein

American Economic Review, 1990, vol. 80, issue 3, 465-79

Abstract: This paper examines some of the forces that can lead to herd behavior in investment. Under certain circumstances, managers simply mimic the investment decisions of other managers, ignoring substantive private information. Although this behavior is inefficient from a social standpoint, it can be rational from the perspective of managers who are concerned about their reputations in the labor market. The authors discuss applications of the model to corporate investment, the stock markets, and decision-making within firms. Copyright 1990 by American Economic Association.

Date: 1990
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