HERD BEHAVIOR, BUBBLES AND CRASHES

This paper attempts to formalise herd behaviour or mutual mimetic cont agion in speculative markets. The emergence of bubbles is explained as a self-organising process of infection among traders leading to equil ibrium prices which deviate from fundamental values. It is postulated furthermore that the speculators' readiness to follow the crowd depend s on one basic economic variable, namely actual returns. Above average returns are reflected in a generally more optimistic attitude that fo sters the disposition to overtake others' bullish beliefs and vice ver sa. This economic influence makes bubbles transient phenomena and lead s to repeated fluctuations around fundamental values.