when it’s not your own money on the line but someone else’s, your incentives may change. Under some circumstances, in fact, it may be quite rational for traders to take positions that lose money for their firms and their investors if it allows them to stay with the herd and reduces their chance of getting fired.70 There is significant theoretical and empirical evidence71 for herding behavior among mutual funds and other institutional investors.72 “The answer as to why bubbles form,” Blodget told me, “is that it’s in everybody’s interest to keep markets going up.”
