A 2025 study by Cui, Abu Bakar, and Bakar, published in the International Journal of Accounting and Economics Studies, surveyed individual investors on their decision-making process, herding tendencies, and psychological biases. The findings are not surprising but worth quantifying.

The core result

70.6% of respondents reported that market trends were the primary driver behind their investment decisions. Not fundamentals, not valuations, not risk-adjusted return expectations. Trends.

This result sits at the center of what behavioral finance has argued for decades: most investors are not the rational agents that classical portfolio theory assumes. They watch what others do, and they follow.

How herding damages portfolios

The paper identifies three direct consequences of herding for portfolio management:

• Concentration risk. Herding investors pile into popular stocks and sectors. During the crypto boom, the dot-com era, and every sector rotation in between, this pattern repeats. Portfolios become overweight in whatever is fashionable, leaving investors exposed when the correction arrives.

• Excessive trend exposure. Momentum chasing without fundamental analysis leads to buying overvalued assets in up markets and panic selling in down markets. The classic buy high, sell low cycle.

• Asset mispricing. When enough investors herd into the same trade, prices disconnect from intrinsic value. This creates the bubbles and crashes that define market history.

The psychological layer

The study also measures how specific cognitive biases reinforce herding:

Overconfidence was especially pronounced among male investors, who tended to concentrate in riskier assets while believing they could outperform. Loss aversion kept investors holding losers too long and cutting winners too early, a textbook prospect theory outcome. FOMO pushed respondents into trending assets they did not fully understand, particularly those promoted on social media.

These biases are not independent. They stack. An overconfident investor who fears missing out and cannot stomach losses is almost guaranteed to end up with a concentrated, poorly timed portfolio.

The ESG angle

An interesting side finding: herding also distorts ESG investing. Many respondents integrated ESG criteria not because they evaluated the underlying sustainability practices, but because ESG was popular. This creates the same mispricing risk in sustainable assets that herding produces everywhere else.

What this means for systematic investing

None of this is new to quantitative investors, but the data reinforces why systematic approaches exist. Rules-based portfolio construction is, at its core, a defense against exactly these behaviors. Predefined rebalancing schedules prevent trend chasing. Diversification constraints prevent concentration. Signal-based allocation replaces gut feeling.

The study recommends financial literacy, independent research, and long-term focus as countermeasures. These are reasonable but unrealistic at scale. The more practical answer, and the one this research implicitly supports, is to remove human discretion from the parts of the investment process where it does the most damage.

That is what systematic models are for.

Reference: Cui, D., Abu Bakar, A.S., & Bakar, N.B. (2025). Herding Behavior and Portfolio Management: A Behavioral Finance Perspective on Individual Investors. International Journal of Accounting and Economics Studies, 12(7), 353-362. https://doi.org/10.14419/2k6wex42