Herding: the steady state of the uncertain markets

This is a syndicated repost courtesy of True Economics. To view original, click here. Reposted with permission.

Markets are herds. Care to believe in behavioral economics or not, safety is in liquidity and in benchmarking. Both mean that once large investors start rotating out of one asset class and into another, the herd follows, because what everyone is buying is liquid, and when everyone is buying, they are setting benchmark expected returns. If you, as a manager, perform in line with the market, you are safe at the times of uncertainty and ambiguity. In other words, it is better to bet on losing or underperforming alongside the crowd of others, than to bet on a more volatile expected returns, even though these might offer a higher upside.

How does this work? Here:

Everyone loves Corporate debt, until everyone runs out of it and into Government debt. Everyone hates Government debt, until everyone hates corporate debt. It’s ugly. But it is real. Herding is what drives markets, even though everyone is keen on paying analysts top dollar not to herd.

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