The Cost of Following the Crowd

Kok Loang Ooi (), Norazlin Binti Ab Aziz () and Wee Yeap Lau ()
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Kok Loang Ooi: Universiti Malaysia
Norazlin Binti Ab Aziz: Universiti Malaysia
Wee Yeap Lau: Universiti Malaysia

Chapter Chapter 3 in Following the Crowd: Psychological Drivers of Herding and Market Overreaction, 2025, pp 43-56 from Springer

Abstract: Abstract Financial markets have consistently demonstrated that collective investor behaviour, particularly herding and overreaction, significantly contributes to asset mispricing, market inefficiency, and economic instability. The propensity of investors to conform to collective behaviour often leads to speculative bubbles, whereby asset prices diverge from intrinsic values, and the market collapses when panic-driven sell-offs intensify financial losses. Psychological influences, including social proof, fear of missing out, and risk aversion, propel these behaviours, resulting in illogical decision-making and increased volatility. These repercussions extend beyond individual investors, including financial institutions and pension funds, and impact overall economic stability. An exemplary illustration of the consequences of conforming to popular opinion is the housing bubble of the early 2000s. Driven by excessive optimism, accessible financing, and speculative investments, the housing market experienced artificial inflation, followed by a significant collapse that precipitated a systemic catastrophe with enduring economic consequences. Comprehending the financial and psychological implications of herd behaviour is essential for investors, regulators, and policymakers seeking to mitigate the risks associated with market-wide irrationality and promote more sustainable financial decision-making.

Date: 2025
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DOI: 10.1007/978-981-95-0792-4_3

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