How Does “Herding Behavior” in Financial Markets Amplify Systemic Risk?

Herding behavior occurs when investors mimic the actions of a larger group, often ignoring their own analysis. In financial markets, this can lead to asset bubbles or sudden, sharp sell-offs (panics).

In a highly leveraged derivatives market, herding amplifies systemic risk by concentrating positions and creating a self-reinforcing price movement that can trigger mass liquidations and defaults, spreading instability across the system.