Herd Behavior and Cascading in Capital Markets : A Review and Synthesis

We review here theory and evidence relating to herd behavior, payoff and reputational interactions, social learning, and informational cascades in capital markets. We offer a simple taxonomy of effects, and evaluate how alternative theories may help explain evidence on the behavior of investors, firms, and analysts. We consider both the incentives for parties to engage in herding or cascading, and the incentives for parties to guard against or take advantage of herding or cascading by others