Economics Herd Behavior Questions
Herd behavior can significantly influence stock market bubbles. When investors observe others making profitable investments, they tend to follow the crowd and engage in similar investment strategies. This behavior leads to a self-reinforcing cycle where more and more investors join in, driving up stock prices beyond their intrinsic value. As a result, stock market bubbles form, characterized by overvaluation and excessive speculation. However, when the herd behavior eventually shifts, and investors start selling their stocks, it can trigger a rapid decline in prices, leading to a market crash or bubble burst.