Perception alignment hypothesis: causality of herding?

Purpose - The purpose of this paper is to uncover an institutional reason behind herding and the key to successful execution of the accumulation-lift-distribution (ALD) trading strategy. Design/methodology/approach - The paper proposes the perception alignment hypothesis (PAH), which is based on a large number of empirical episodes. Extensive empirical and theoretical literature of 79 articles is reviewed. These are selected from previously unrelated fields of prosecuted cases in market manipulation, sell-side analysts’ recommendations and internet rumors. These studies are put into a unifying conceptual framework. Findings - The proposed PAH can explain some herding episodes that were generated for the purpose of executing ALD. Practical implications - The value of the approach is that while behavioral biases are hard to change, perception alignment can be more responsive to regulation. Originality/value - This paper is the first to propose the PAH. It provides an explanation for the causality of herding that complements the traditional literature on the psychological weaknesses of investors. This paper opens a debate on whether the stock market is fully competitive because investors have behavioral biases and certain institutions take advantage of those biases.