Humans have a strong tendency to belong to a group, an instinct that often manifests in herding behavior. Not limited to humans, herding exists throughout nature, for example in ant colonies, schools of fish, and flocks of birds. But what about the stock market?
Although we may like to believe that our rational side (“Homo economicus”) dominates when it comes to financial decision-making, a new study shows that herding behavior can explain several features of stock markets that are not explained very well by more rational factors. Understanding the human emotional side to investing could even lead to human-guided trading algorithms and improved market stability….
“It is important to understand that a big part of the activities in the stock market are not derived from rational thinking and the flow of information, but rather from emotional human behavior,” Shapira told Phys.org. “This is contrary to the accepted point of view that governs economic theories. Using physical terms, financial markets are very noisy. We show that most of the ‘noise’ is due to human emotional factors and has to be analyzed as such.” More here Herding in the stock market may inspire human-guided trading algorithms.