Herding And Social Proof . By The Time The Group Agrees, The Trade Is Finished

Saturday morning. The family WhatsApp group lights up. Someone forwards a stock that has already doubled, with one line under the chart . "everyone is in this one."

Here is the part nobody in the group wants to hear. That line is not the signal the trade is safe. It is the signal the trade is late.

By the time a name is consensus, the marginal buyer who could push it higher has mostly already bought. The agreement did not create the upside. It used up the fuel.

Watch where the money actually arrives, not where the chart already went. Take a hot momentum strategy. It prints a quiet +28 pct in year one on Rs 400 cr of assets. Then +72 pct in its headline year on Rs 1100 cr. Then the screenshots start circulating, and in year three the assets balloon to Rs 14000 cr . the crowd shows up the year after the return. Year four hands back 19 pct as the crowding unwinds.

The strategy's factsheet still prints a healthy time weighted number, about 16.7 pct CAGR across the four years. But the return the average rupee actually earned, money weighted, sits near 3 pct, because the bulk of the money entered right before the worst window. A roughly 14 point gap. That gap is the herd tax, and almost nobody sees it because the brochure measures the strategy, not the timing of the people in it.

The asymmetry is structural. Money chases winners far harder than it flees losers (Sirri and Tufano, 1998). And a consensus is informationally thin . people copied the visible choice, not the underlying fact (Banerjee 1992, and Bikhchandani Hirshleifer and Welch on informational cascades, 1992). Copied conviction reverses fast on small new information.

By the time the group agrees, the trade is finished. The agreement did not make it safe. It used up the fuel