Imagine you hold an asset of any type. At the moment, the asset XYZ is worth 1M$ according to the price quoted on the exchange. Now, what would be your instinctive reaction if you suddenly discovered that your asset XYZ is instead worth 100k$, but you can still go to the exchange and sell it for 1M$? Of course, you would rush back to the exchange faster than Usain Bolt at the Olympics.
Now, imagine a second person holds the very same asset XYZ and she knows you hold the same because once you bumped on the floor of the exchange trading it. What do you think will be this person’s instinctive reaction if she sees you running as fast as possible towards the exchange? At the minimum, she will wonder if anything is happening at the exchange, but reasonably she will wonder whether something happened to asset XYZ she holds too. At this point, she starts walking towards the exchange to figure out what’s going on.
In this example, you see the power of herd behavior at work, similar to when Forrest Gump suddenly decides to run across the US one day and people start following him knowing less and less information on why he was running, where he was going and how long he would have kept running.