Economics Herd Behavior Questions
Herd behavior influences the formation of economic bubbles by creating a self-reinforcing cycle of buying and selling based on the actions of others rather than fundamental economic factors. When individuals observe others making profits from a particular asset or investment, they tend to follow suit, fearing missing out on potential gains. This leads to a surge in demand and drives up prices beyond their intrinsic value, creating a bubble. As more people join the herd, the bubble continues to inflate until it reaches a point where it becomes unsustainable. Eventually, the bubble bursts, resulting in a sharp decline in prices and significant financial losses for those involved.