Herding Behavior in Individual Investors: Evidence & Market Consequences

Details

Supervisors

D'Hondt, Catherine

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

enIn 2021, the GameStop episode demonstrated the growing influence of individual investors on financial markets. Retail investors, coordinated through online communities, managed to trigger a historic short squeeze from institutional investors, driving stock prices upward. Such events show that understanding the behavior of individual investors is not only relevant for academic research but also for market participants, especially those seeking to anticipate or manage volatility. Moreover, the rise of social media platforms and 'finfluencers' amplifies imitation patterns, commonly referred to as herding. Despite this evidence, traditional finance models continue to rely on the assumption of investor rationality. In the 1970s, Eugene Fama’s EMH argued that asset prices reflect all available information, implying that persistent deviations from fundamental values should not occur and that assets are fairly priced. However, events like the GameStop one show that markets become inefficient when collective biases dominate, emphasizing the importance of behavioral finance. Research on herding behavior among both institutional and retail investors has grown considerably in recent years. Although rational investors should not neglect their own information, a significant share of them actually does. They tend not only to imitate others’ strategies, but also to replicate their overall behavior. This thesis is based on behavioral finance literature and established herding measures, notably the Lakonishok, Shleifer and Vishny measure (LSV) and the Individual Herding Measure (IHM). The study by Merli and Roger (2013) employing the IHM also significantly shapes this thesis. The originality of this paper lies in linking classic herding metrics, such as LSV, with detailed investor data from the Rallye Boursier and contemporary market dynamics. Herding patterns are analyzed using socio-demographic, cultural, portfolio-related and stock-level variables. In addition, this empirical study combines behavioral theories and modern investor characteristics to contribute to the literature on retail investor herding.