`Herd instinct' rules stock market
Your support helps us to tell the story
From reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. Whether it's investigating the financials of Elon Musk's pro-Trump PAC or producing our latest documentary, 'The A Word', which shines a light on the American women fighting for reproductive rights, we know how important it is to parse out the facts from the messaging.
At such a critical moment in US history, we need reporters on the ground. Your donation allows us to keep sending journalists to speak to both sides of the story.
The Independent is trusted by Americans across the entire political spectrum. And unlike many other quality news outlets, we choose not to lock Americans out of our reporting and analysis with paywalls. We believe quality journalism should be available to everyone, paid for by those who can afford it.
Your support makes all the difference.THE STOCK MARKET is ruled as much by the "herd instinct" of traders, as any rational assessment of a company's worth, scientists have found.
The assessment, based onmathematical assumptions more familiar to physicists, has revealed that stock markets are a fundamentally irrational enterprise. Thomas Lux, professor of economics at the University of Bonn, and Michele Marchesi of the University of Cagliari in Italy, show in the journal Nature that some traders exert a significant influence on share prices by merely following the crowd.
The researchers found that traders adopted two clear strategies. One, the "fundamentalist", expected prices to follow a company's future worth. The other, the "noise trader", tried to identify what other traders would do in order to anticipate price changes.
"Instead of focusing on fundamentals, these agents attempt to identify price trends and patterns and also consider the behaviour of other traders as a source of information, which results in a tendency towards herding behaviour," the researchers say.
Within this group there are pessimists, who will sell shares irrationally, and optimists, who will buy them for the same illogical reasons.
Join our commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies
Comments