Contents
Definition
Herd behavior in financial markets describes the phenomenon whereby investors imitate the portfolio decisions of a larger group rather than acting on their own independent analysis. Robert Shiller's Irrational Exuberance (2000, Princeton University Press) is the canonical modern treatment: Shiller demonstrated that US equity valuations in the late 1990s could not be explained by fundamental cashflow models and were instead driven by self-reinforcing narrative feedback loops — a classic herding dynamic. The formal economic literature traces back to Banerjee (1992, "A Simple Model of Herd Behavior," Quarterly Journal of Economics) and Bikhchandani, Hirshleifer & Welch (1992, "A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades," Journal of Political Economy), who modeled herding as rational under information asymmetry: when private signals are noisy, observing others' actions is informative. The problem is that cascades can lock in on incorrect states when early movers are wrong.
How it manifests in Indian retail investing
India has provided some of the most vivid recent episodes of financial herding globally. The 2017–2021 IPO cycle saw 63 mainboard IPOs in FY2022 alone, with subscription data showing retail categories oversubscribed 30–50× for high-profile listings. The SME IPO segment in FY2024 saw average retail oversubscription exceeding 200× — figures that cannot be explained by independent fundamental analysis across 1.2 crore+ applicants. NFO (New Fund Offer) behavior mirrors this: fund houses strategically time NFO launches to follow strong market periods, and AMFI data shows NFO collections correlate with trailing-six-month Nifty returns at r > 0.6. The 2022 crypto collapse in India disproportionately affected retail investors who entered CoinSwitch/CoinDCX platforms in December 2021 — the peak month — drawn by influencer-driven social proof, a digital herding mechanism.
What the data shows
SEBI's 2024 study on retail F&O participation found that over 1.13 crore unique individuals traded equity F&O in FY2023–24, a 54% increase over FY2021–22. Of these, 93% of individual traders incurred net losses, yet new entrants continued to register at the rate of ~3 lakh per month — consistent with a herding dynamic where social proof (observing others trading) overcomes the negative expected value signal. Shiller's CAPE ratio analysis across 26 markets shows that herding-driven P/E expansion precedes major market corrections in 80% of cases over rolling 10-year windows. In India, the Nifty 50 P/E crossed 40× in October 2021 — a level breached only twice in 20 years — accompanied by record demat account openings of 34.2 lakh in that month alone (CDSL/NSDL data).
Worked example
An SME IPO is announced in September 2024 with an issue size of ₹60 crore and no analyst coverage. On Day 1 of subscription, the retail portion receives ₹800 crore in bids — 40× oversubscribed. Day 2 sees ₹2,400 crore (120×). Day 3: ₹6,000 crore (300×). Each day, potential applicants observe the oversubscription figure and interpret high demand as a buy signal, irrespective of the company's financials. The allotment lottery means most applicants receive nothing; those who do receive allotment face a listing pop followed by a 6-month lock-in cliff when anchor investors exit. In 60% of SME IPO listings in FY2024 that crossed 200× subscription, the price 6 months post-listing was below the issue price (NSE SME data, SEBI Annual Report 2024).
How to recognise it in yourself
Herd behavior diagnostic questions: (1) Is the primary reason for considering an investment "everyone is doing it" or a high subscription number, rather than a financial model or allocation rationale? (2) Did the investment idea originate from social media, WhatsApp groups, or a peer recommendation rather than independent research? (3) Has the analysis changed since first hearing about it, or is the original social-proof signal still the primary driver? (4) If the subscription figure or price momentum reversed tomorrow, would the investment thesis still hold? These questions probe whether the decision is anchored on crowd behavior rather than underlying fundamentals.
See also
Primary sources
- Shiller, R.J. (2000). Irrational Exuberance. Princeton University Press.
- Bikhchandani, S., Hirshleifer, D. & Welch, I. (1992). A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades. Journal of Political Economy, 100(5), 992–1026.
- SEBI Annual Report 2023–24 — Retail Participation Data.
MintByte (ARN-314872 / APMI APRN-01658) is a SEBI-registered MFD and GIFT City wealth management firm. This glossary entry is educational and does not constitute investment advice.