Herd Behaviour and FOMO: Why Everyone Seems to Buy at Once

Every few years, a particular corner of the market becomes impossible to ignore. It might be a newly listed company whose IPO is oversubscribed many times over, a group of small-cap stocks that has doubled in a few months, or a cryptocurrency that friends and relatives suddenly want to talk about at dinner. Screenshots of profits circulate in WhatsApp groups. Social media is full of confident predictions. And a quiet voice starts asking: what if everyone else is right and I am the only one missing out?

That feeling, now widely known as FOMO, the fear of missing out, is closely tied to a broader pattern that economists call herd behaviour. Understanding why the crowd exerts such a strong pull, and why it can lead people astray, is one of the most useful pieces of self-knowledge an investor can have.

Following others can be perfectly logical

It is tempting to describe herd behaviour as simply irrational, but the research suggests something more interesting. In 1992, two influential papers, one by Abhijit Banerjee and another by Sushil Bikhchandani, David Hirshleifer, and Ivo Welch, showed that copying others can be a reasonable response to uncertainty. If you are not sure whether something is a good idea, and you see many people before you choosing it, it is sensible to infer that they may know something you do not.

The problem these researchers identified is what happens next. Once enough people are following the crowd instead of their own information, later decision-makers learn very little from watching others, because those others were also just following. Bikhchandani, Hirshleifer, and Welch called this an 'informational cascade'. Cascades can form around good choices or bad ones, and because they rest on surprisingly little actual information, they can also reverse quickly when a small piece of new information arrives. That fragility is part of why crowded trades can unwind so sharply.

Why markets amplify the effect

Financial markets add a feedback loop that ordinary fads do not have. When many people buy an asset, its price rises, and that rising price is itself treated as evidence that the buyers were right. Robert Shiller, who shared the 2013 Nobel Memorial Prize in Economic Sciences for work on asset prices, has long argued that stories and social contagion play a large role in this process: a compelling narrative spreads, prices rise, the rise makes the narrative more convincing, and more people join in. The same loop can run in reverse during a sell-off.

Today's information environment speeds this loop up considerably. A tip shared in a Telegram channel can reach thousands of people within minutes. Short videos make complex instruments look simple. Social proof, the comfort of seeing others do the same thing, is available on demand.

How herding shows up for Indian retail investors

• Applying to an IPO mainly because subscription figures are high and 'listing gains' are being discussed, without reading the offer document or understanding the business.
• Buying a stock after it has already risen sharply because it is trending on social media or being discussed in a group chat.
• Starting to trade futures and options after seeing others post screenshots of large profits, while the far more common losses go unposted.
• Moving money into whichever mutual fund category had the best returns last year, because that is what everyone is recommending.
• Selling in a panic during a sharp market fall because everyone in the group seems to be selling.

A related danger is that crowds can be manufactured. Regulators in India have taken action over the years against operators who promoted stocks through social media and messaging groups while selling their own holdings into the buying they had stirred up. The Securities and Exchange Board of India (SEBI) maintains a public list of registered investment advisers and research analysts, and it has tightened rules on regulated entities associating with unregistered financial influencers. A confident tone and a large follower count are not the same thing as being registered or accountable.

The survivorship problem in what you see

One reason FOMO is so persuasive is that the evidence reaching you is heavily filtered. People share their wins far more readily than their losses. A screenshot of a ₹50,000 profit on an option trade travels widely; the many smaller losses that may have come before it do not. Funds and strategies that did badly quietly disappear from the conversation. The result is a picture of the market in which almost everyone seems to be making money, which makes your own caution feel like a mistake.

Practical ways to slow the impulse

The aim is not to become a contrarian who automatically does the opposite of the crowd, which is just another way of letting the crowd decide for you. The aim is to make sure that your decision rests on your own reasons. Some techniques that help:

• Apply a cooling-off rule. Before acting on anything you first heard about from social media or a group chat, wait 24 to 72 hours and see whether the idea still makes sense when the excitement has faded.
• Ask the 'silent market' question: would I still want to own this if nobody I knew was talking about it and I could not tell anyone I had bought it?
• Check the messenger. Is the person recommending it registered with SEBI as an adviser or research analyst? Do they disclose their own positions? What do they gain if you act?
• Write down your reason in one sentence before you buy. If the only reason you can write is that it has gone up and others are buying, that is worth noticing.
• Size speculative ideas deliberately small, so that being wrong about a crowded trade cannot damage your long-term goals.
• Remember that missing a rally is a cost you can recover from; a large loss from buying at the peak of a frenzy may take much longer to recover.

The takeaway

Herding is not stupidity. It is an understandable response to uncertainty, and in many everyday situations following the crowd works well. In markets, however, crowds can form on very thin information and can reverse abruptly, and the stories that reach you are filtered towards success. Building in a pause, checking who is behind the advice, and insisting on your own written reason are simple habits that keep the crowd's enthusiasm from becoming your decision by default.