HerdingBehaviour - Group1 - HANSIKA SAINI

Aayush Saroha (20304) | Hansika Saini (20339) | Jasleen Kaur Dhanjal (20348) 1
DSE
Beh
SCF …. …. ….
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Neanderthal Homo Sapien

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informational cascades
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fads
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booms
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crashes
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WHAT IS HERDING BEHAVIOR?
Herding behavior refers to the tendency of

individuals to follow the actions or
decisions of a larger group, often without
questioning or considering alternative
options. This behavior is commonly
observed in various contexts, including
financial markets, social situations, and
animal behavior.
prey species, who band together in market inefficiencies, lack of

social norms, groupthink, a fundamental analysis of the
large groups to protect themselves from
desire to conform underlying assets
predators
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TYPES OF HERDING BEHAVIOR
INFORMATIONAL Believe that others have more information and

HERDING base decisions on other’s action
Believe that what others are doing

MIMETIC HERDING
is “socially acceptable”
Follow others as they aspire to be

ASPIRATIONAL HERDING like them
Decisions based on fear or emotional

PANIC HERDING
reactions to a perceived threat
Follow the actions of others as part of a larger

STRATEGIC HERDING
strategy
pseudo herding pattern, investor due to the

SPURIOUS HERDING availability of the same data by others, makes
similar decisions
I don’t follow herd mentality……ehhhh
Large number
of people
Strong social cannot be
pressure wrong
Information Increased
sharing liquidity
Trend
identification
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HERDING IN STOCK MARKET
Information
Assymetry A
Social
B Influence
Confirmation
Bias C
Fear And
D Greed
Herding behavior can lead to efficient decision-making and can help to reduce volatility in the
market. However, in other cases, it can lead to market bubbles or crashes, as investors follow the
actions of others without considering the underlying fundamentals of the assets in question.
HERDING’S IMPACT ON INVESTMENT DECISION
Risk
Increase risk in investment
decisions
Return
Impact potential returns on
investment decisions, lead to
positive or negative returns
Timing
Investors may enter or exit the
market at the same time, which
can cause price movements to
become more extreme
Market Efficiency
Lead to asset prices becoming
overvalued or undervalued
IRRATIONAL EXUBERANCE
A situation where economic agents develop confidence in the economy and financial markets that is misplaced.
Consumers, bankers, and firms become overly confident and expect asset prices to keep rising and growth to remain
strong. Irrational exuberance is a factor behind the financial crisis.
WHAT HAPPENS NEXT?

Rapid
Asset Inflation
Increased willingness
to take risk
Growth in
speculation
Tendency to ignore the potential

for asset prices to fall
IRRATIONAL EXUBERANCE
HOW IS IT RELATED TO HERDING?
Fear of missing out
Self-reinforcing speculative
investments
Price distortions and market

inefficiencies
CASE STUDIES: BUBBLES
CASE: TULIP MANIA 1637
The success of the Dutch economy meant that the

middle class had cash to drop on luxury items, and
tulips were one of their favorites.
Tulips were new to the Netherlands and hard to

get, which made them a status symbol.
In the 1630s Tulip prices began to rise.

And then prices went from high to

completely insane.
Tulips only bloom in the spring. The rest pf the

year, the flowers turn back into bulbs. But that
didn’t stop people from buying them.
So instead of buying the tulip itself, they’d buy a

contract that meant they would get the tulip
in the future.
This is nothing but a Futures Contract which

can be easily resold.
CASE: SOUTH SEA BUBBLE (1720)
BACKGROUND
Britain had a massive debt of $31 million pounds while at the same time, it had a meagre
50,000 pounds in reserves to service this obligation. The Government of England was
basically bankrupt as it had no way to pay the next interest instalments that would be due
on the loans.
RESPONSE: South Sea Company Established
This company would be granted exclusive rights to trade in products and slaves with Central and South America.
But, Spain ruled Central and South America, and Britain was at war with Spain. Nonetheless, the British managed to
persuade them to grant them the right to trade slaves in addition to the ability to load one ship of cargo every year at
each port in South America.
CASE: SOUTH SEA BUBBLE (1720)
WHAT HAPPENED NEXT?

Excess shares created by
John Blunt
Put 20% of the money down

to take ownership of the
stock
Artificial Demand was

created; escalating the prices
further
Started selling shares for just

10% down with the balance
to be paid out a year later
CASE: DOT COM BUBBLE
WHAT IS DOT COM BUBBLE? HOW DID IT HAPPEN?

A period of excessive speculation in Internet-related It grew out of a combination of the presence of
companies in the late 1990s and early 2000s speculative investing, the abundance of venture capital
funding for startups, and the failure of dotcoms to turn a
profit.
Investors poured money into Internet startups during the

1990s hoping they would one day become profitable.
Many investors and venture capitalists abandoned a
cautious approach for fear of not being able to cash in on
the growing use of the Internet.
CASE: DOT COM BUBBLE
ROLE OF HERDING HERE

REFERENCE
• https://www.managementstudyguide.com/south-sea-bubble.htm
• Chatgpt
• https://www.investopedia.com/terms/d/dotcom-bubble.asp
• https://www.britannica.com/event/dot-com-bubble
• https://www.economicshelp.org/blog/404/economics/economics-of-irrational-exuberance/
• https://tradebrains.in/investing-herd-mentality/
• https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2827453/#:~:text=Herding%20can%20be%20defined%20as,of%20th
eir%20own%2C%20private%20information.
THANK YOU

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Aayush Saroha (20304) | Hansika Saini (20339) | Jasleen Kaur Dhanjal (20348) 1

Neanderthal Homo Sapien

Herding behavior refers to the tendency of

prey species, who band together in market inefficiencies, lack of

INFORMATIONAL Believe that others have more information and

Believe that what others are doing

Follow others as they aspire to be

Decisions based on fear or emotional

Follow the actions of others as part of a larger

pseudo herding pattern, investor due to the

WHAT HAPPENS NEXT?

Tendency to ignore the potential

Fear of missing out

Price distortions and market

The success of the Dutch economy meant that the

Tulips were new to the Netherlands and hard to

In the 1630s Tulip prices began to rise.

And then prices went from high to

Tulips only bloom in the spring. The rest pf the

So instead of buying the tulip itself, they’d buy a

This is nothing but a Futures Contract which

RESPONSE: South Sea Company Established

WHAT HAPPENED NEXT?

Put 20% of the money down

Artificial Demand was

Started selling shares for just

WHAT IS DOT COM BUBBLE? HOW DID IT HAPPEN?

Investors poured money into Internet startups during the

ROLE OF HERDING HERE

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