7 Psychological Biases Retail Investors Show During IPO Season

The IPO season often injects a healthy dose of excitement among retail investors. It provides an avenue for individuals to share in early growth stories, when companies list shares for the first time on the stock exchange. But with this excitement, emotions run high, expectations become paramount, and decisions are increasingly made on psychological rather than analytical lines. 

Seven common biases that operate during IPO season are listed below.

1. Herd Mentality Bias 

When subscription numbers are encouraging or news sources highlight the popularity of an IPO, many investors rush to apply without properly understanding the IPO full form or evaluating the offer systematically. Herd mentality bias is especially rampant during such times, where the thought process becomes, "What is good for so many people must be good for me." This reasoning is misguided, as demand doesn't always indicate the true potential of a company. Often, investors apply simply to avoid the fear of missing out rather than assessing whether the IPO aligns with their actual portfolio.

2. Overconfidence Bias

IPO time makes the investors overconfident in themselves, thinking that they can predict the performance of almost any newly listed company based on a shallow understanding. For instance, many may end up with allotment in one offering and then listing gains, thus starting to believe that they have a special talent for IPOs. This overconfidence then takes them in risks like applying for larger amounts or looking at multiple IPOs indiscriminately.

3. FOMO 

FOMO is a strong emotional force during IPOs. The excitement surrounding checking the allotment status, along with online chatter, creates neediness. Retail investors feel pressured to buy just because everyone else is, gripped by the fear of missing out on those potential listing gains. Hence, the buyer is now in an impulsive mode, where the focus shifts from long-term investment goals to short-term thrills.

4. Anchoring Bias 

Anchoring bias refers to the fact that too much weight is given by investors to a piece of information being offered-the IPO price band and its oversubscription numbers. For example, if an investor hears that the IPO is priced at a discount compared to recent listings, he/she disregards any valuation-based assessment of the IPO's attractiveness. Thus, a high level of subscription may anchor expectations with respect to a strong listing, vice versa, the market seldom corroborates that.

5. Confirmation Bias

Once an investor develops a favorable opinion about an IPO, confirmation bias leads him to look only for the information that confirms his view while ignoring information that contradicts it. For example, if he expects a strong listing, he will pay attention only to those news reports, subscription data, or analyst opinions that reinforce his decision. This self-imposed blindness makes room for unreasonable judgment and may miss the opportunity to evaluate probable risks.

6. Recency Bias

Recency bias is the phenomenon whereby events that have transpired recently receive a relatively high weight in the investment decision. For instance, during the IPO season, if for a short period of time a couple of listings have given high returns, investors expect all coming IPOs to do the same. 

Such an environment with high expectations may further leave them with high hopes on one hand and vulnerability to disappointment in the opposite extreme if the play did not favour them. Thus, the whole IPO allotment status check process becomes more or less a ritual nurtured by the expectations that what had been happening recently could go on infinitely. 

7. Disposition Effect

The disposition effect explains investors' tendencies to keep losing investments and sell winning investments too early. In the IPO context, this may mean keeping stocks in a company that has listed below the issue price on account of hoping against hope that it would come back-or cutting losses. On the flip side, if the stock takes off with quick listing gains, some investors cash in immediately to lock in profits, even if the company shows potential for steady long-term growth.

Retail investors can make these impartial moves:

Before applying for an IPO, clearly define the objective, whether it is for short-term listing gains or long-term investment.

Examine fundamentals-it could be the company financials, the industry outlook, or its growth strategies-and not just follow subscription numbers or what media says.

Spread the applications rather than committing everything to a single offering. This helps in balancing out against the risk in case one IPO does not turn out well.

The final step of acceptance is calm-whether the status tells that you have received an allotment or not-walking onto the second step without emotional interference.

Conclusion

The IPO season is a threshold time full of anticipation, optimism, and speculation. For retail investors, understanding the psychological biases that influence them may assist in creating informed choices rather than spontaneous ones. From the herd mentality and overconfidence through recency effects to the disposition effect, those cognitive shortcuts often unconsciously steer establishing behaviors.