The sheep model is an important abstract model in economics and social sciences, often used to analyze herd behavior and market dynamics. The core concept is derived from the observation of the behavior patterns of sheep in natural groups, especially in response to environmental changes. This model provides a simplified framework for studying how individuals interact in groups.

In the sheep model, each sheep represents an economic individual whose behavior is influenced by the environment and the behavior of other individuals. This model emphasizes the role of information transmission, with individuals adjusting their decisions based on the choices and behavior of surrounding sheep. The imitative nature of this behavior makes the group's choice tend to focus on a certain direction at a certain time, similar to the following effect of investors in the market. When a trend appears, more and more individuals may follow it, creating a chain reaction that can cause the market to fluctuate or crash.

A key feature of the sheep model is the perception of risk. Individuals often consider the behavior of other individuals when making decisions, resulting in a "safety in the group" mentality. This psychology is particularly evident in the market, for example, in the economic boom, investors may rush into the market because they see the profits of others, and in the economic downturn, they may panic and withdraw en masse. This behavior not only affects individual economic decisions, but also has a profound impact on the stability of the market as a whole.

In addition, the sheep model also reflects the conformity effect in social psychology. When individuals face uncertainty, they often rely on the behavior of others as the basis for decision-making. At this time, the individual's independent thinking ability is weakened, resulting in the entire group's decision may not be rational, often irrational price fluctuations and trend following.