Psychological Drivers of Herding

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 4 in Following the Crowd: Psychological Drivers of Herding and Market Overreaction, 2025, pp 57-68 from Springer

Abstract: Abstract Herding behaviour in financial markets is fundamentally based on psychological processes that supersede rational decision-making, resulting in market inefficiencies, speculative bubbles, and economic disasters. This chapter analyses the fundamental psychological motivators of herding, highlighting how emotions such as anxiety, greed, and the fear of missing out influence investor behaviour. Fear, often instigated by ambiguity and adverse market indicators, leads to panic selling and a systemic financial decline. Greed drives speculative excess, promoting risk-seeking behaviour that exacerbates asset bubbles. The fear of missing out, intensified by social influence and digital media, drives hasty investment choices that lack adequate examination. This chapter combines historical and contemporary case studies to demonstrate these emotional triggers, ranging from previous financial crises to current digital trading occurrences. By understanding these psychological motivators, investors and regulators can develop strategies to mitigate the adverse effects of emotion-driven herding, thereby promoting more stable markets and informed financial decision-making.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-95-0792-4_4

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DOI: 10.1007/978-981-95-0792-4_4

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