Rational Herding

Rational herding occurs when individuals or investors follow the actions of a larger group, not because of a lack of information or irrationality, but because they believe the group has better information or insights. In financial markets, rational herding can lead to bubbles or market crashes, as investors mimic the behavior of others, amplifying market trends. This behavior is rational when an individual believes that following the group maximizes their own utility, even if it leads to suboptimal outcomes.

Example

During a stock market rally, investors engage in rational herding by buying stocks because they assume the market has more information and expects prices to rise further.