The psychology of crowds plays a significant role in driving market bubbles from "summary" of A Short History of Financial Euphoria by John Kenneth Galbraith
The psychology of crowds is a subject of profound importance in the financial world. It is through the collective behavior and emotions of individuals that market bubbles are formed and sustained. When a group of people become convinced that a particular asset is on an upward trajectory, they tend to disregard rational analysis and simply follow the crowd. The power of this collective mindset is such that it can lead to exuberant market conditions where prices are driven to unsustainable levels. In the midst of a bubble, investors are often guided by the fear of missing out and the desire to profit from the continued rise in prices. This herd mentality can cause rational decision-making to be thrown out the window. One of the key reasons why market bubbles occur is the inherent human tendency towards greed and overconfidence. In the midst of a euphoric market environment, investors often believe that they ar...
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