What is rational herding?
This refers to a phenomenon where participants in the financial markets react to the behaviour of other participants, rather than taking their cues from the markets themselves.
Where have you heard about rational herding?
This can be a common occurrence and has been explored by numerous analysts and academics over the years. Such herding behaviour is sometimes blamed for market instability.
What you need to know about rational herding.
It is important for investors to be aware of the concept of rational herding in financial markets. It often occurs when one investor observes another acting in a certain way, for example, selling a particular instrument unexpectedly. The first investor may then believe that the second knows something that they don't, such as some sort of negative information about the firm in question. If this effect is multiplied many times over, it can cause a huge rush of people selling the asset in question, and the share price falling. This in turn can lead to wider market instability.
Find out more about rational herding.
Rational herding could in theory contribute to events such as bank runs.