Rational herdingIn economics and finance, rational herding is a situation in which market participants react to information about the behavior of other market agents or participants rather than the behavior of the market, and the fundamental transactions.[1][2] An account cited that rational herding is an unintended consequence of the string of Federal Reserve interventions that mandated greater transparency of others' trade activities starting in 2007.[3] Due to crisis environment and uncertainty in the market fundamentals, investors started to use the Federal Reserve's information found in its policy pronouncements.[3] Rational herding in financial markets can take place because some investors believe others to be better informed than themselves, and follow them, disregarding their own information or market fundamentals.[4] This is based on the idea that if information is costly for an uninformed actor, his ignorance is rational and that, if he cannot afford the information, there is a potential benefit of following another player who can pay for such information.[5] Reliance on rational herding can be a source of instability in financial markets.[1] There are also scholars who note that rational herding is still based on anecdotal observations and that there is lack of empirical evidence due to the way the so-called "herding literature" focuses on the price or investment patterns, information that is readily available.[6] References
|
