•Contagious risk perception augurs the dark side in peer to peer transactions.•Pluralistic Ignorance governs the emergence of dark side in P2P transactions.•Pluralistic ignorance is induced by three rational considerations.•They are inertial routines, tenure specific transactions & regulatory mandate.•P2P transaction preference from pluralistic ignorance is a rational outcome. This paper investigates the role of pluralistic ignorance as a credible governance mechanism mitigating the emergence of the dark side in peer-to-peer transactions. Using the empirical context of the Indian banking industry, this paper identifies three underlying dimensions of pluralistic ignorance arising from firm, relationship, and institutional factors and links them to peer-to-peer transaction preferences, especially under conditions of uncertainty. By focusing on a particular type of interorganizational relationship that is recurrent but devoid of specific asset investment, this paper provides an alternative governance mechanism that complements the formal and relational contract-based approaches to mitigating the dark side in interorganizational transactions prevalent in the existing literature.