From IPO Frenzy to F&O: Behavioural Finance in the Indian Securities Markets

India's retail investor landscape has undergone a remarkable transformation over the past decade. Digital brokerage platforms, simplified account opening procedures, and widespread access to market information have brought millions of first-time investors into the securities market. Retail participation in equities, mutual funds, and derivatives has expanded significantly, reflecting a broader democratisation of financial markets.

Yet increased participation raises an important question: are Indian retail investors becoming more financially informed, or simply more financially active?

Behavioural finance provides a useful framework for examining this question. Traditional finance assumes that investors process information rationally and make decisions that maximise expected utility. Behavioural finance, by contrast, recognises that decisions are often influenced by cognitive biases, emotions, and social influences.¹ These psychological factors can affect how investors interpret information, perceive risk, and respond to gains and losses.

Recent developments in the Indian market provide several illustrations of these behavioural dynamics.

IPO Participation and Investor Sentiment

The case of the Paytm IPO offers an interesting example. In November 2021, One97 Communications raised approximately ₹18,300 crore through what was then India's largest initial public offering.² The stock listed below its issue price of ₹2,150 and closed its first trading session on the BSE at ₹1,564.15, a decline of 27.24% from the issue price.³

The IPO illustrates how investor sentiment and herding behaviour may influence participation in highly publicised offerings.

Herding occurs when investors rely on the actions or opinions of others rather than conducting independent analysis. In conditions characterised by uncertainty and information asymmetry, the behaviour of other market participants can become a substitute for private evaluation. When media coverage, analyst commentary, and public discussion generate widespread enthusiasm, investors may interpret popularity as evidence of quality, even when objective valuation remains difficult.

More systematic evidence emerges from SEBI's study of investor behaviour in IPOs.⁴ Analysing 144 main board IPOs listed between April 2021 and December 2023, the study found that approximately 54% of IPO shares allotted to investors (excluding anchor investors) were sold within one week of listing. Individual investors sold roughly half of their allotted shares by value during this period. Furthermore, the study documented behaviour consistent with the disposition effect, whereby investors were more likely to sell shares that had generated listing gains than shares that had listed at a loss.

The disposition effect, first documented by Odean,⁵ describes the tendency of investors to realise gains too quickly while retaining losing investments for too long. This behaviour is often explained through prospect theory, which suggests that losses are psychologically more painful than equivalent gains are pleasurable. Consequently, investors may avoid selling loss-making securities because doing so requires accepting a realised loss, while gains are realised quickly to secure the emotional satisfaction associated with profit.^1,5

Futures and Options Trading: Risk Perception and Overconfidence

SEBI's 2024 study reported that 93% of individual traders in equity F&O incurred losses between FY2022 and FY2024, while aggregate losses exceeded ₹1.8 lakh crore over the three-year period.⁶ The study also noted that only a very small proportion of traders generated substantial net profits after accounting for transaction costs. Far from an incidental correlation, the 93% failure rate in equity derivatives demonstrates how overconfidence actively pushes retail participants to underprice downside risk in volatile trading environments.

Overconfidence refers to the tendency of individuals to overestimate the accuracy of their knowledge, forecasts, or abilities. In financial markets, investors may believe they possess superior stock selection or market timing skills despite a lack of evidence supporting such confidence. Repeated participation and occasional profitable trades can reinforce these beliefs, creating an illusion of skill even when long-term performance remains poor.

Behavioural research also documents the phenomenon of self-attribution bias, whereby investors disproportionately attribute successful outcomes to their own abilities while explaining failures as the result of external circumstances. Such biases may encourage excessive trading and underestimation of risk.

Finfluencers, Social Proof, and Herding

According to SEBI's Investor Survey 2025,⁷ 59% of investors reported relying on friends, family, and colleagues as sources of information about securities-market products, while 56% relied on financial influencers ("finfluencers") on social media platforms. The survey additionally found that 93% of investors considered finfluencers moderately to highly credible, while 62% reported making at least some investment decisions based on their recommendations.

Social proof occurs when individuals infer the correctness of a decision from the behaviour or beliefs of others. In investment contexts, repeated exposure to the same recommendation across YouTube channels, Instagram reels, WhatsApp communities, and online forums can increase its perceived credibility irrespective of underlying fundamentals.

This does not imply that information disseminated through social media is necessarily inaccurate. Rather, behavioural finance suggests that the popularity of an idea can itself become a decision-making cue. Investors may view a widely discussed opportunity as less risky simply because many others appear to support it.

Conclusion

Behavioural finance offers valuable insights into the evolution of India's retail investor ecosystem. Evidence from IPO participation, derivatives trading, and social media driven investing suggests that psychological factors continue to shape financial decisions, even in an environment characterised by unprecedented access to information.

Recognising behavioural biases can help investors make more informed choices, assist regulators in designing effective investor protection measures, and encourage market intermediaries to communicate risks more clearly.

India is undoubtedly witnessing the emergence of a new generation of financially active citizens. Whether it also develops a generation of consistently better decision-makers may depend on the ability of market participants to bridge the gap between information and judgement.

Shubhangi Jain is a behavioural science researcher and a B2B marketing professional, with a Masters in Behavioural Science from the London School of Economics

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