Herding — the Psychology of Buying Because Others Do
Have you ever hurriedly bought a stock a friend bought because, when it rose, you somehow felt you were the only one falling behind? Behavioral finance calls this urge to move 'the way everyone else does' herding.
What Is Herding?
Herding is the mindset of 'buying because others are buying and selling because others are selling' — not because you researched and judged for yourself. It comes from the image of a herd rushing off after the sheep in front.
Why does this happen? People are far less afraid of being wrong together than of being wrong alone. When everyone is buying and you alone aren't, you feel left out (FOMO); conversely, when everyone is selling and you alone are holding, you feel anxious. So you end up following 'what the majority does' as if it were the right answer, rather than your own information or analysis.
These days, social media, YouTube, and online communities have made this crowding even faster. As stories of who made how much spread in real time, it has become an environment where you can easily get swept up in the crowd without realizing it.
Herding is a little different from simply 'making a wrong judgment.' The core is handing your judgment over to others entirely. The moment you base your decision on 'other people's actions' rather than information, you've already set foot in herding.
Why Is It Dangerous? — Prices Drift Away from True Value
When many people rush in the same direction, an asset's price drifts further and further from its actual value (fundamentals). Everyone buys, so the price rises; it rises, so more people buy, so it rises again… This baseless inflation is exactly what a 'bubble' is.
The problem is that a bubble eventually bursts. When the crowd's direction suddenly flips to 'sell,' this time everyone rushes to sell in reverse, and the price collapses in an instant. The crowd rules on the way up and on the way down alike.
That's why herding is especially dangerous for individuals. If you climb aboard late, after the crowd has already run far ahead, you're likely to experience the worst timing of all — buying at the top and selling at the bottom.
This doesn't mean following the crowd is always bad. But if you follow along without being able to explain to yourself 'why I'm buying,' that's closer to gambling than investing. Remember that.
The Price the Crowd Paid, as History Showed — the Dot-Com Bubble
The most famous case is the U.S. 'dot-com bubble' of the late 1990s. Amid expectations that the internet would change the world, the share prices of '.com' companies with almost no profit or revenue soared wildly. It was textbook herding: buying because everyone else was buying.
The tech-heavy Nasdaq Composite Index peaked at about 5,048 on March 10, 2000. But when the bubble burst, it fell to about 1,114 by October 2002. That's a drop of about 78% from the peak. A million won became 220,000 won.
Even more painful was the recovery period. The Nasdaq did not surpass its 2000 peak again until April 2015 — a full ~15 years later. Anyone who got swept up by the crowd and bought at the top had to endure a very long time before recovering their principal.
The figures can vary slightly depending on the index, currency, and dividend-reinvestment assumptions. Here we used the roughly '-78% drop, ~15-year recovery' that multiple sources (Wikipedia, NPR, etc.) commonly cite for the Nasdaq Composite Index.
It Happened in Korea Too — and How to Break Free
Korea is no exception. After the market crashed with COVID in 2020, individual investors bought stocks en masse in the so-called 'Donghak retail investor' phenomenon. Within a month they net-bought tens of trillions of won on the KOSPI, with money heavily flowing into familiar large caps like Samsung Electronics. There was also a strong element of following each other's actions through communities and YouTube.
So how do you break free from herding? First, build the habit of buying because 'I can explain the reason' rather than because 'others are buying.' Second, buying steadily over time in small amounts (recurring investing) instead of going all-in at once reduces the risk of a specific point-in-time surge. Third, checking for yourself how badly the crowd has been wrong in the past — and what the drawdown and recovery period looked like then — is a good vaccine.
On 'The Return of Almost Everything,' the site I run myself, I've made it so you can see these things with your own eyes. You can compare lump-sum investing with recurring investing, or see in the data how much things actually fell during a crisis and when they recovered. When you look at the numbers instead of the crowd's mood, you pause to think once more before getting swept away.
This article is not at all about telling you to buy or sell any particular stock. Read it as a 'psychology story' about building the strength to judge for yourself instead of following others.
Frequently Asked Questions
Q. Does following the crowd always mean a loss?
Not necessarily. Sometimes the crowd happens to be going the right way. But if you follow others without being able to explain to yourself 'why I'm buying,' you can't respond when the crowd changes direction, so you easily get caught at the worst timing — buying at the top and selling at the bottom. The problem isn't the outcome; it's the very approach of 'handing your judgment over to others.'
Q. What can I do to avoid getting swept up in herding?
Three things help. (1) Before buying or selling, write 'my reason' in a single sentence. (2) Rather than going all-in at once, consider recurring investing that spreads purchases steadily over time. (3) Check the drawdown and recovery period of past bubbles and crashes in advance, so you remember that 'the crowd has been badly wrong many times too.' Doing this lets you pause for a beat before getting swept up by the mood.
Q. Did the Nasdaq really fall 78% during the dot-com bubble?
Yes. The Nasdaq Composite Index fell about 78% from its peak, from about 5,048 in March 2000 to about 1,114 in October 2002. On top of that, it didn't surpass that peak again until about 15 years later, in 2015. It's a case that clearly shows how, if you get swept up by the crowd and buy at the top, just recovering your principal can take a very long time.
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