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Animal Spirits

Are investors and traders cats, rationally and independently sniffing out returns? Or are they cows, flowing with a herd that must know something? These blog entries relate to behavioral finance, the study of the animal spirits of investing and trading.

Overview of Investor Herding

Investor herding is convergence of behavior based only on observation of what others are doing (such as buying or selling). Examples in the stock market are trend-following, “don’t fight the tape” and momentum investing. Herding is distinct from investors acting at the same time but independently in response to news related to investment fundamentals (such as the latest jobs report from the Bureau of Labor Statistics or a company earnings release). In their December 2001 paper entitled Herd Behavior and Cascading in Capital Markets: A Review and Synthesis, David Hirshleifer and Siew Hong Teoh provide an overview of financial herding. Keep Reading

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