Investors base their decisions on a role model who they believe has better market knowledge. – The ultimate cause is the fear of being wrong with one’s own assessment. Herd behavior pays off for the individual, especially if one assumes that very many follow the same pattern of action; the motto here is: “The trend is your friend”. In this way, especially on financial markets – and here again mainly on the currency markets – price exaggerations (price swings; bubbles) are amplified in both directions. – An example of herd behavior was the development in Southeast Asia in 1997/98. A phase of extremely high capital inflows into this region was suddenly followed by a collective withdrawal of investors. – With regard to investment funds: the fund managers of small and medium-sized funds follow the leading funds – usually affiliated with major U.S., German or Swiss banks – in the composition of their portfolios (portfolio composition: in the composition of individual assets), often quite closely. They then also make their own decisions against the explicit recommendation of their own analysts. This is because the fund managers believe that by aligning themselves with the leading funds they are most likely to escape accusations of poor performance. – See assessment, contrary, exotikomania, financial psychology, early warning systems, fear thesis, counter-speculation theory, shorn, gigabank, gambling effect, size confidence, hedge fund strategies, information, asymmetric, hindsight, housing bubble, information, asymmetric, myopia, Martin principle, opinion buying, milkmaid bull market, imitation, informal, feedback loop, sine curve fetishism, staggering, payday ground rule, retracement, cyclical.
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk
https://www.jung-stilling-gesellschaft.de/merk/
https://www.gerhardmerk.de/