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Herd Behavior in a Laboratory Financial Market

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Author Info
Marco Cipriani (George Washington University)
Antonio Guarino (UCL)

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Abstract

We study herd behavior in a laboratory Þnancial market where a sequence of subjects trades an asset whose value is unknown. In two treatments the price is updated according to a deterministic rule based on the order ßow, and in another it is updated by experimental participants. Theory predicts that agents should never herd. Our experimental results are in line with this prediction. Nevertheless, we observe a phenomenon that cannot be accounted for by the theory. In some cases, subjects decide not to use their private information and choose not to trade. In other cases, they ignore their private information to trade against the market (contrarian behavior). (JEL C92, D8, G14)

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Paper provided by EconWPA in its series Experimental with number 0502002.

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Length: 30 pages
Date of creation: 17 Feb 2005
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Handle: RePEc:wpa:wuwpex:0502002

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Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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    Other versions:
  4. Mathias Drehmann & Jörg Oechssler, 2004. "Herding and Contrarian Behavior in Financial Markets - An Internet Experiment," Econometric Society 2004 North American Winter Meetings 55, Econometric Society. [Downloadable!]
    Other versions:
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  7. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October. [Downloadable!] (restricted)
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  16. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August. [Downloadable!] (restricted)
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  20. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1703, 08. [Downloadable!] (restricted)
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  22. Dorothea K¸bler & Georg Weizs”cker, 2004. "Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory," Review of Economic Studies, Blackwell Publishing, vol. 71(2), pages 425-441, 04. [Downloadable!] (restricted)
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  24. Marco Cipriani & Antonio Guarino, 2008. "Herd Behavior and Contagion in Financial Markets," Contributions to Theoretical Economics, Berkeley Electronic Press, vol. 8(1), pages 1390-1390. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marco Cipriani & Antonio Guarino, 2006. "Transaction Costs and Informational Cascades in Financial Markets: Theory and Experimental Evidence," WEF Working Papers 0008, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
    Other versions:
  2. Weizsäcker, Georg, 2008. "Do We Follow Others When We Should? A Simple Test of Rational Expectations," IZA Discussion Papers 3616, Institute for the Study of Labor (IZA). [Downloadable!]
  3. Francesco Feri & Miguel A. Meléndez-Jiménez & Giovanni Ponti & Fernando Vega Redondo, 2008. "Error Cascades in Observational Learning: An Experiment on the Chinos Game," Working Papers 2008-21, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
    Other versions:
  4. Frederic Koessler & Charles Noussair & Anthony Ziegelmeyer, 2007. "Information Aggregation and Beliefs in Experimental Parimutuel Betting Markets," Jena Economic Research Papers in Economics 2007-033, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics, Thueringer Universitaets- und Landesbibliothek. [Downloadable!]
    Other versions:
  5. Tim Grebe & Julia Schmid & Andreas Stiehler, 2006. "Do individuals recognize cascade behavior of others? An Experimental Study," Discussion Papers 180, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  6. Marco Angrisani & Antonio Guarino & Steffen Huck & Nathan Larson, 2008. "No-Trade in the Laboratory," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
    • Marco Angrisani & Antonio Guarino & Steffen Huck & Nathan Larson, 2008. "No-Trade in the Laboratory," WEF Working Papers 0045, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
  7. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2005. "Herding with and without Payoff Externalities - An Internet Experiment," Working Papers 0420, University of Heidelberg, Department of Economics, revised Apr 2005. [Downloadable!]
    Other versions:
  8. Park, Andreas & Sgroi, Daniel, 2008. "Herding and Contrarianism in a Financial Trading Experiment with Endogenous Timing," The Warwick Economics Research Paper Series (TWERPS) 868, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  9. Frederic Koessler & Ch. Noussair & A. Ziegelmeyer, 2005. "Individual Behavior and Beliefs in Experimental Parimutuel Betting Markets," THEMA Working Papers 2005-08, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
  10. Antonio Guarino & Marco Cipriani, 2008. "Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals," IMF Working Papers 08/141, International Monetary Fund. [Downloadable!]
    Other versions:
  11. Asen Ivanov & Dan Levin & James Peck, 2008. "Study of a Small-Market Investment Game with Common and Private Values," Working Papers 0801, VCU School of Business, Department of Economics. [Downloadable!]
  12. Jacob K. Goeree & Thomas R. Palfrey & Brian W. Rogers & Richard D. McKelvey, 2006. "Self-Correcting Information Cascades," Levine's Bibliography 321307000000000211, UCLA Department of Economics. [Downloadable!]
    Other versions:
  13. Jonathan E. Alevy & Michael S. Haigh & John List, 2006. "Information Cascades: Evidence from An Experiment with Financial Market Professionals," NBER Working Papers 12767, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. BISIÈRE, Christophe & DÉCAMPS, Jean-Paul & LOVO, Stefano, 2009. "Risk Attitude, Beliefs Updating and the Information Content of Trades: An Experiment," IDEI Working Papers 552, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  15. Christoph Brunner & Jacob K. Goeree, 2009. "Wise crowds or wise minorities?," IEW - Working Papers iewwp439, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  16. Tambakis, D.N., 2008. "Feedback Trading and Intermittent Market Turbulence," Cambridge Working Papers in Economics 0847, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  17. Morone, Andrea & Fiore, Annamaria & Sandri, Serena, 2008. "On The Absorbability Of Herd Behaviour And Informational Cascades: An Experimental Analysis," MPRA Paper 6884, University Library of Munich, Germany. [Downloadable!]
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