Question

What is the definition of herding and how does it contribute to bubbles?

Answer 1

Herding means when one follows others or the crowd , so everyone goes in the same direction,. While this applying to equities and other asset classes, when there is buying interest in a asset, its value goes up which attracts interest of others even though valuations are higher, so current demand encourage more demand which results in continuous rise in price levels to very high point from where there is no upside left but there is huge downside risk. So this way herding contribute to bubbles.