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Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

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Author Info
Mathias Drehmann
Jörg Oechssler
Andreas Roider

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Abstract

We report results of an internet experiment designed to test the theory of informational cascades in financial markets (Avery and Zemsky, AER, 1998). More than 6000 subjects, including a subsample of 267 consultants from an international consulting firm, participated in the experiment. As predicted by theory, we find that the presence of a flexible market price prevents herding. However, the presence of contrarian behavior, which can (partly) be rationalized via error models, distorts prices, and even after 20 decisions convergence to the fundamental value is rare. We also study the effects of transaction costs and the expectations of subjects with respect to future prices. Finally, we report some interesting differences with respect to subjects' fields of study.

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Publisher Info
Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse25_2002.

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Length: 56
Date of creation: Oct 2002
Date of revision: Apr 2003
Handle: RePEc:bon:bonedp:bgse25_2002

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 9221
Web page: http://www.bgse.uni-bonn.de/index.php?id=494

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Related research
Keywords: herd behavior; informational cascades; contrarian investors; market efficiency; internet experiment;

Other versions of this item:

Find related papers by JEL classification:
C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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References listed on IDEAS
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