Does Herd Behaviour Restrain Trading? Empirical Evidence from Gen Z and Gen X Investors in India

Abstract

In recent times, there have been many studies indicating that cognitive biases significantly affect the trading decisions of individual investors. In an emerging market, such as India, which is witnessing rapid digitisation, this phenomenon becomes more evident. 
The objective of this study is to analyse the aggregate effect of three behavioural biases herd behaviour, overconfidence, and loss aversion on four types of trading decisions purchasing stocks, selling stocks, purchasing mutual funds, and selling mutual funds amongst a sample size of 384 retail investors in India, divided into two generations (Generation Z and Generation X). 
Using binary logistic regression and Mann-Whitney U tests, results indicate that there is a statistically significant negative effect of herd behaviour on all four types of trading decisions, contrary to what is commonly accepted knowledge. The generation is found to be a significant determinant of mutual fund purchases, with Generation X exhibiting higher involvement in line with the lifecycle investment hypothesis. The overconfidence and loss aversion variables did not demonstrate significant predictive ability in any trading decision, possibly due to demographic composition and data measurement issues. Gender was found to be marginally significant in terms of overconfidence, consistent with previous academic studies.