Herd Mentality In Investing: Why The Crowd Is Not A Strategy

When many people around us are buying the same stock, applying for the same IPO, or forwarding the same market view, the decision can feel safer. Herd mentality works that way: it makes imitation feel like evidence.

For an investor, the better question is not "How many people are doing this?" It is "Does this decision fit my goal, risk capacity, time horizon and evidence?"

An Indian couple reviews a crowded phone-based investment idea while an advisor brings the discussion back to an independent checklist.

Popular Can Still Be Unsuitable

Herd behaviour usually begins with a reasonable trigger. A stock is discussed widely. A sector has done well recently. A friend has made money. A financial influencer sounds confident. An IPO is oversubscribed. None of these signals is automatically wrong, but none of them is a complete investment case.

SEBI's Investor Survey 2025 shows why this matters. The survey found that personal contacts, finfluencers and digital peer groups are among the top sources of securities-market information for investors. Friends, family and colleagues were cited by 59% of investors, financial influencers on social media by 56%, and online investment communities such as Telegram, WhatsApp, Reddit and Facebook groups by 34%.

SEBI Investor Survey 2025: common information sources that can amplify herd behaviour
Information source Reported share of surveyed investors How it may create crowd pressure
Friends, family and colleagues 59% Trust in familiar people can make a weak idea feel reliable.
Financial influencers on social media 56% Confidence, frequent posts and follower counts can be mistaken for suitability.
Online investment communities 34% Group excitement can compress the time available for verification.
Financial news and blogs 28% A widely discussed theme may appear more certain than the data supports.
Financial professionals and market/company analysis reports 25% each More structured sources can help, but investors must still check conflicts, assumptions and suitability.

The same survey also reported that 93% of surveyed investors considered finfluencers moderately to highly credible, and 62% made some investment decisions based on finfluencer recommendations. This is not a reason to reject every online source. It is a reason to separate education from advice, and popularity from evidence.

Why The Herd Feels Convincing

The herd feels convincing because it reduces emotional discomfort. If many people are doing something, the investor may feel that the decision has already been validated. That comfort can hide three important gaps.

First, the crowd may not share the same financial situation. A trader with surplus capital, a salaried investor building a child's education corpus, and a retiree needing income cannot use the same risk template.

Second, the crowd may not reveal its exit plan. A person who says "I bought" may not say when they sold, how much they allocated, or whether the position was only a short-term trade.

Third, the crowd may arrive late. By the time a story is widely forwarded, valuation, liquidity and risk may have changed.

SEBI's Chairman, in a November 2025 investor-awareness address, cited the Investor Survey 2025 and noted that only 36% of current investors possessed a moderate or high level of securities-market knowledge, while 62% relied on recommendations from friends, family or social media instead of registered intermediaries. The message for investors is direct: awareness is not the same as understanding.

IPO Hype Is A Useful Case Study

IPO excitement often becomes a herd signal. Oversubscription, listing-day talk and quick-profit stories can make an investor feel that missing the issue means missing the opportunity.

SEBI's 2024 study of 144 main-board IPOs listed between April 2021 and December 2023 found that individual investors sold 50% of the shares allotted to them by value within a week of listing, and 70% within a year. The study also found that when IPO returns exceeded 20%, individual investors sold 67.6% of allotted shares by value within a week; when returns were negative, the corresponding figure was 23.3%.

This does not mean IPO investing is wrong. It means crowd enthusiasm may include short-term flipping behaviour. A long-term investor should read the offer document, business model, valuation, use of proceeds, risk factors and lock-in implications before applying.

A Simple Anti-Herd Checklist

Before following a popular investment idea, slow the decision down with five checks.

Five checks before following a popular investment idea
Check Question to ask Why it helps
Source Who is making the claim, and are they registered or accountable for advice? It separates regulated guidance from casual opinion or promotion.
Evidence Is there a written rationale, official filing, scheme document or credible research source? It forces the decision to stand on facts, not repetition.
Suitability Does this fit my goal, horizon, liquidity need, tax position and risk appetite? A good product can still be wrong for the wrong investor.
Allocation What percentage of my portfolio will this affect if the idea fails? It prevents one popular idea from damaging the full plan.
Exit rule What would make me sell, rebalance or avoid adding more? It reduces emotional decisions during volatility.

What The Infographic Shows

The same investors set crowded phone messages aside and review research documents, personal goals and risk checks with an advisor.

The visual shows a better decision sequence: keep crowd messages visible but separate, review source documents, connect the idea to personal goals, and then decide whether the risk belongs in the portfolio. The phones are not ignored; they are simply not allowed to control the decision.

Investor Checklist

Use this short pause before acting on a popular idea:

  1. Am I investing because I understand the idea, or because others are discussing it?
  2. Have I checked the source, registration status and possible conflict of interest?
  3. Have I read the relevant official document, exchange filing, scheme document or offer document?
  4. Do I know the downside, liquidity risk, tax impact and exit rule?
  5. Would I still make this decision if nobody else was talking about it?

If the answer is unclear, wait. The market will offer many future opportunities, but capital lost to imitation is difficult to rebuild.

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Reviewed by Abhipra Research / Compliance Team.

Disclaimer

This article is for educational and informational purposes only. It should not be considered investment advice, trading advice, tax advice or insurance advice. Investments in securities market are subject to market risks. Please read all related documents carefully before investing. Past performance is not indicative of future returns. Please consult a qualified financial advisor, tax advisor or insurance advisor before making any financial decision.