A Review of the Impact of Herding Effect on Investor Behavior

Abstract

In recent decades, financial markets have witnessed frequent episodes of extreme volatility, asset bubbles, and sudden crashes that cannot be adequately explained by traditional finance theories rooted in the rational investor assumption. Behavioral finance has emerged as a critical framework for understanding these anomalies, with herding effect serving as one of the most influential explanatory concepts. This paper systematically reviews the impact of herding effect on investor behavior by examining its core mechanisms, manifestations, measurement approaches, and multi-dimensional consequences. Through a comprehensive literature review and synthesis of existing theoretical and empirical studies, this paper analyzes the driving forces behind herding behavior from the perspectives of information economics, principal-agent theory, and behavioral finance, and evaluates the measurement models developed to quantify such behavior in financial markets. The findings reveal that herding behavior significantly undermines market pricing efficiency, amplifies asset price volatility by fueling bubbles and accelerating crashes, erodes individual investor wealth through mistimed entry and exit, and distorts corporate governance by encouraging managerial short-termism. The paper concludes by identifying research gaps and proposing directions for future inquiry.