Stock market bubble and herding

He has not detailed how he plans to pay for it. We have a stock market bubble, and we have a bond market bubble," the former Federal Reserve chairman told Bloomberg TV on Wednesday. This can be seen in financial bubbles where asset prices rapidly spike upwards far beyond what could be considered the rational "economic value", only to fall rapidly afterwards.

The Federal Reserve has been criticized for helping to inflate the housing bubble by keeping interest rates too low.

Like all dynamic systems, financial markets operate in an ever-changing equilibrium, which translates into price volatility. This pressure is likely familiar to many of us, as most people are very sociable and have a natural desire to be accepted by a group, rather than be branded as an outcast.

The best advice is to always do your homework before buying in to any trend. It was thus concluded that the success of the campaign was rooted in the fact that its means of communication was the audience itself, giving the target audience a sense of ownership and empowerment.

The leader of the Fed at the time? Herd mentality often takes a front seat when it comes to social marketingpaving the way for campaigns such as Earth Dayand the variety of anti-smoking and anti-obesity campaigns seen in every country.

Thus the herd appears as a unit in moving together, but its function emerges from the uncoordinated behavior of self-serving individuals.

Using physical terms, financial markets are very noisy. In many cases, herd behavior is a set of decisions and actions that an individual would not necessarily make on his or her own.

Taking a conservative or contrarian position as a bubble builds results in performance unfavorable to peers. Even if herd behavior might only be observed rarely, this has important consequences for a whole range of real markets — most particularly foreign exchange markets. The s was the decade when Internet and e-commerce technologies emerged.

Characteristics of escape panic include: However, a self-adjustment negative feedback takes place normally: While previous research has attempted to explain these two features—price fluctuations and collective behavior—as the result of new information, this by itself is not sufficient for two main reasons.

Herding in the stock market may inspire human-guided trading algorithms

Swarm theory observed in non-human societies is a related concept and is being explored as it occurs in human society. The second of the strands of literature motivating this paper is that of information aggregation in market contexts. Bond prices have cooled since then, but the stock market has kept heating up.

This puts a limit on volatility. The question, then, is how could something as catastrophic as this happen over and over again? Both bubbles came to an abrupt end inbankrupting thousands of unfortunate investors.

Herd behavior

The two most famous bubbles of the twentieth century, the bubble in American stocks in the s just before the Wall Street Crash of and the following Great Depressionand the Dot-com bubble of the late s, were based on speculative activity surrounding the development of new technologies.

Herd behaviours shown in the two examples exemplify that it can be a powerful tool in social marketing, and if harnessed correctly, has the potential to achieve great change.

In The Theory of the Leisure ClassThorstein Veblen explained economic behavior in terms of social influences such as "emulation," where some members of a group mimic other members of higher status.

First, prices fluctuate much more rapidly than new substantial information is released. Money managers thus feel pressure to follow general trends.

Stock Market Bubble and Herding

Avoiding the Herd Mentality All investors feel some temptation to follow the latest investment trends. It is clear that opinion leaders and their influence achieve huge reach among their reference groups and thus can be used as the loudest voices to encourage others in any collective direction.

Stock market bubbles[ edit ] Large stock market trends often begin and end with periods of frenzied buying bubbles or selling crashes.The mutual fund manager who predicted stock market crashes in the tech bubble bust and the financial crisis is sounding the alarm.

Free Essay: Herding is an everyday phenomenon from personal to financial contexts. The focus of this paper is to explore the theory of herding, namely. Jul 30,  · Watch video · Martin Feldstein, National Bureau of Economic Research president emeritus, discusses why the stock market is very close to a bubble and why he thinks the Fed should raise interest rates to four.

In this paper we investigate the herding behaviour of the Bucharest Stock Exchange (BSE), using log periodic power laws models.

Behavioral Finance: Key Concepts - Herd Behavior

By analysing the behaviour of t Daniel Traian Pele. Bucharest Academy of Economic Studies.

Herd Instinct

Keywords: Log-periodic Power Law, Stock Market Bubble, Crash. Herding is an everyday phenomenon from personal to financial contexts. The focus of this paper is to explore the theory of herding, namely Compensation Based Herding (CBH) and its effect on financial markets.

By Nathan Reiff. Key Concept No Herd BehaviorOne of the most infamous financial events in recent memory would be the bursting of the internet bubble. However, this wasn't the first time that.

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Stock market bubble and herding
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