Behaviour and investing series June 2026

Markets can be influenced as much by investor behaviour as by economic and company fundamentals. Last quarter, we explored loss aversion and the tendency for investors to react strongly to market declines. Another common behavioural bias occurs at the opposite end of the cycle, when rising markets and widespread optimism encourage investors to follow the crowd.

Concept #2: Herd behaviour — why investors follow the crowd

Humans naturally look to others for cues when making decisions, particularly during periods of uncertainty. In everyday life, this can be helpful, allowing us to learn from others’ experiences. In investing, however, it can lead to herd behaviour, in which decisions are driven less by independent analysis and more by other investors’ actions.

Herd behaviour often emerges during periods of strong market performance. As prices rise, media attention increases, success stories become more common, and investors who have remained on the sidelines may begin to worry about missing out. This can create a self-reinforcing cycle in which rising prices attract additional investors, pushing prices higher still.

The Dot-com Bubble of the late 1990s provides a well-known example. As excitement surrounding the growth of the internet accelerated, investors rushed to buy shares in technology and internet-related companies. As more investors joined the trend, valuations became increasingly detached from underlying fundamentals, and expectations became difficult to justify.

When the bubble burst in early 2000, many investors experienced significant losses. While the internet ultimately transformed the global economy, the enthusiasm surrounding the sector had pushed many share prices well beyond what underlying business fundamentals could support.

Successful investing often requires a willingness to look beyond prevailing market sentiment. While popular themes and investment opportunities can be attractive, maintaining a disciplined approach and focusing on long-term fundamentals can help investors avoid being swept along by the crowd.