Herd Mentality: When Following the Crowd Costs You
Investor Behaviour 101 — Episode 4
Herd mentality — or the instinct to follow the crowd — is a powerful behavioral force. It's wired into us through evolution: in uncertain environments, copying others often ensured survival. But in investing, this instinct often works against us. As Nobel laureate Daniel Kahneman noted, we are \"not rational economic agents\" — we're emotional participants prone to shortcuts and social validation.
Whether it’s a bull market frenzy or a bear market panic, the tendency to do what others are doing can lead to poor timing, misaligned risk-taking, and ultimately, wealth destruction.
What Drives Herd Mentality?
-
Fear of Missing Out (FOMO): A powerful driver where investors fear being left behind when others appear to be profiting.
Example: Google Trends data shows spikes in “Bitcoin” searches often follow price rallies — a classic FOMO behavior. -
Information Cascade: Occurs when individuals mimic others’ actions and disregard their own information.
Example: The Paytm IPO saw high retail demand based on subscription buzz, not fundamentals — it dropped over 25% post-listing. -
Social Proof: When investors do what most others are doing, believing it must be right — especially in uncertain times.
Example: Many investors flock to “most bought stocks” lists on broker apps, which amplifies herd momentum. -
Bandwagon Effect: As more people invest in something, even more follow — often leading to bubbles.
Example: Tesla’s 2020 rally drew retail interest as the price soared, leading to speculative entries far above intrinsic value.
| Driver | Trigger | Risk Created |
|---|---|---|
| FOMO | Seeing others profit | Buying high, trend chasing |
| Information Cascade | Ignoring own judgment | Collective poor decisions |
| Social Proof | “Everyone is doing it” | Blind imitation |
| Bandwagon Effect | Growing popularity | Bubble formation, overvaluation |
India Examples: Herding in Action
In 2017–2018, mid-cap and small-cap funds saw a retail investment surge. Morningstar reported record inflows in January 2018 — right before a major correction. Investors followed peers and past performance, not valuations.
Yes Bank (2018–2020) is another classic case. Despite mounting concerns over NPAs and governance, retail ownership peaked in 2019. Herd behavior led many to double down — only to see the stock crash over 90%.
Similarly, during 2022–2023, Adani Group stocks witnessed massive volatility. Investors rushed in during the rally, fueled by media and influencer sentiment, only to panic-sell after short-seller reports surfaced.
Ruchi Soya FPO (2022): After Patanjali’s takeover, retail enthusiasm drove shares up 100x within months. The FPO drew massive attention, despite SEBI warning of speculative trades. The stock corrected sharply post-listing.
Suzlon Energy (2008 & 2022): Retail investors heavily bought into Suzlon in both its original boom and recent “green energy” revival, despite long-term business risks. Herd sentiment was triggered largely by price nostalgia and low entry points.
IRCTC (2021): The public sector monopoly saw a 400% rise in share price, attracting herd investors. However, a sudden 25% crash in October 2021 after policy news led to panic exits — especially among recent entrants.
Cryptocurrency Boom (2020–2021): Retail investors in India flocked to crypto apps during the Bitcoin and Dogecoin frenzy, mostly following peers and influencers. Many joined late and suffered heavy losses in 2022.
The Hidden Costs of Herding
- Buying at peaks and selling during dips: When investors follow the crowd, they often enter an asset after it has already rallied, driven by headlines or social buzz. This leads to buying at elevated prices. Conversely, panic selling happens when the same crowd exits during market falls. The end result is a buy-high, sell-low cycle — the opposite of successful investing.
- Portfolio overlap and concentration risk: Herd behavior frequently results in too many investors owning the same few stocks or sectors — like IT in 2000, infrastructure in 2008, or mid-caps in 2017. This overexposure amplifies downside when the theme reverses. Diversification is compromised, and portfolio volatility increases sharply.
- Confirmation bias and selective attention: Herd mentality reinforces echo chambers. Investors may ignore negative signals and only seek information that confirms what "the crowd" believes. This leads to delayed exits, holding onto poor assets, and missed warning signs — even when fundamentals change.
- Deviation from personal financial goals: Investors swept up in crowd sentiment may stray from their risk appetite or time horizon. They might chase trending stocks that don't align with their objectives (e.g., retirement, child’s education), increasing the gap between planning and execution.
How to Break the Herd Habit
1. Document Your Investment Thesis:
Before investing in any asset — be it a stock, mutual fund, or even an IPO — write down your reasons for doing so. This includes the expected growth drivers, valuation logic, holding period, and what would make you exit. A clearly written thesis acts as an anchor during periods of noise or market volatility. It helps you pause before reacting emotionally or following what everyone else is doing. Over time, comparing outcomes with your original thesis also improves decision quality.
2. Review Performance Quarterly, Not Daily:
Constantly checking your portfolio increases anxiety and makes you vulnerable to herd-driven reactions. By shifting to a structured quarterly review schedule, you give investments time to play out while reducing emotional reactivity. This routine also encourages goal-based analysis — “Am I on track?” — instead of reacting to temporary price moves.
3. Automate via SIPs and Diversified Funds:
One of the most effective ways to overcome behavioral biases is to automate good habits. Systematic Investment Plans (SIPs) enforce discipline and remove timing anxiety. When paired with diversified mutual funds or ETFs, they reduce exposure to specific sectors or momentum-driven fads. Automation builds consistency and protects you from overreacting to short-term news or peer influence.
4. Focus on Fundamentals, Not Popularity:
Avoid basing investment decisions on what is trending or what others are chasing. Instead, focus on the core metrics — revenue growth, profitability, debt levels, competitive moat, and governance. Popularity does not equal profitability. Assets with solid fundamentals may often be out of favor temporarily, but tend to reward patient investors in the long term.
5. Use Tools Like an Investment Journal:
An Investment Journal allows you to record not just what you invested in, but why you did it and how you felt. Over time, it helps uncover personal behavioral patterns — such as chasing hot stocks or panic selling. Reviewing your past decisions in context helps you build awareness and gradually shift from reactive to reflective investing. Journaling reinforces long-term thinking and detaches you from the crowd’s short-term mindset.
To build long-term investing discipline and overcome common emotional traps, we recommend using our free tools: the Investor Behaviour Checklist and Investment Journal.
These are part of our Behavioral Investing Toolkit — designed to help you make more intentional, goal-aligned investment decisions.
Related Reads
- Investor Behaviour 101: Master Your Mind, Master Your Money
- The Bias for Action: How It Hurts Investors and What to Do About It
- SIP vs Lumpsum: Which Investment Strategy is Better in 2025?
Quick Glossary
Information Cascade
When individuals mimic others' decisions assuming they have better info, ignoring their own data.
Bandwagon Effect
The more people do something, the more others want to join — even irrationally.
References
- Forbes – Investors, Don’t Succumb To The Fear Of Missing Out
- Stanford Graduate School of Business – How the Fear of Missing Out Makes Investors Risk Blind
Disclaimer
- Mutual Fund investments are subject to market risks.
- Please read all scheme-related documents carefully before investing.
- Past performance is not indicative of future returns.
- Investors are advised to consult their financial advisor before making any investment decisions.
- Wealth North does not guarantee returns or assume responsibility for investment outcomes.
- This blog is for informational purposes only and does not constitute an offer or solicitation to invest in any financial product.