How Herding Behaviour in Stocks Creates Overreaction

One of the fundamental cognitive biases that clouds are decision making on buying and selling stocks is herding. We are wired to aspire to be on a winning team and we will gravitate are decision making to associate ourselves with winning or hot investment trends. From an institutional perspective, financial analysts, forecasters, and economists, will further exasperate the behaviour by giving higher ratings to hot companies as well as inflated forecasts and consequently lower ratings and forecasts when the environment is weaker.

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