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Information Cascades: Evidence from An Experiment with Financial Market Professionals

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Author Info
Jonathan E. Alevy
Michael S. Haigh
John List

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Abstract

Previous empirical studies of information cascades use either naturally occurring data or laboratory experiments with student subjects. We combine attractive elements from each of these lines of research by observing market professionals from the Chicago Board of Trade (CBOT) in a controlled environment. As a baseline, we compare their behavior to student choices in similar treatments. We further examine whether, and to what extent, cascade formation is influenced by both private signal strength and the quality of previous public signals, as well as decision heuristics that differ from Bayesian rationality. Analysis of over 1,500 individual decisions suggests that CBOT professionals are better able to discern the quality of public signals than their student counterparts. This leads to much different cascade formation. Further, while the behavior of students is consistent with the notion that losses loom larger than gains, market professionals are unaffected by the domain of earnings. These results are important in both a positive and normative sense.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12767.

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Date of creation: Dec 2006
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Handle: RePEc:nbr:nberwo:12767

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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