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Two Experiments to Test a Model of Herd Behaviour

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  • John Hey
  • Louise Allsopp

Abstract

We carry out two experiments to test a model of herd behaviour based on the work of Banerjee (1992). He shows that herding occurs as a result of people observing the actions of others and using this information in their own decision rule. However, in our experiments herding does not occur as frequently as Banerjee predicts. Contrary to his results, the subjects' behaviour appears to depend on the probabilities of receiving a signal and of this signal being correct. Furthermore, he finds that the pattern of decision making over a number of rounds of the game is volatile whereas we find that decision making is volatile within rounds.

Suggested Citation

  • John Hey & Louise Allsopp, "undated". "Two Experiments to Test a Model of Herd Behaviour," Discussion Papers 99/24, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:99/24
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    References listed on IDEAS

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    1. 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.
    2. Anderson, Lisa R & Holt, Charles A, 1997. "Information Cascades in the Laboratory," American Economic Review, American Economic Association, vol. 87(5), pages 847-862, December.
    3. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
    4. Shiller, 021Robert J. & Pound, John, 1989. "Survey evidence on diffusion of interest and information among investors," Journal of Economic Behavior & Organization, Elsevier, vol. 12(1), pages 47-66, August.
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    Cited by:

    1. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2005. "Herding and Contrarian Behavior in Financial Markets: An Internet Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1403-1426, December.
    2. Ponti, Giovanni & Carbone, Enrica, 2009. "Positional learning with noise," Research in Economics, Elsevier, vol. 63(4), pages 225-241, December.
    3. Giovanni Ferri & Andrea Morone, 2014. "The effect of rating agencies on herd behaviour," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 9(1), pages 107-127, April.
    4. repec:cte:werepe:we060201 is not listed on IDEAS
    5. Jacques Pelletan, 2021. "Risk perception with imperfect information and social interactions: Understanding group polarization," Bulletin of Economic Research, Wiley Blackwell, vol. 73(4), pages 688-703, October.
    6. Fiore, Annamaria & Morone, Andrea, 2008. "A Simple Note on Informational Cascades," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-21.
    7. Annamaria Fiore & Andrea Morone, 2005. "Is playing alone in the darkness sufficient to prevent informational cascades?," Papers on Strategic Interaction 2005-09, Max Planck Institute of Economics, Strategic Interaction Group.
    8. Roe, Brian E. & Teisl, Mario F., 2004. "Consumption Externalities, Information Policies, And Multiple Equilibria: Evidence For Genetically Engineered Food Markets," 2004 Annual meeting, August 1-4, Denver, CO 20243, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. Matilde P. Machado & Ricardo Mora & Antonio Romero-Medina, 2012. "Can We Infer Hospital Quality From Medical Graduates’ Residency Choices?," Journal of the European Economic Association, European Economic Association, vol. 10(6), pages 1400-1424, December.
    10. Morone, Andrea & Fiore, Annamaria & Sandri, Serena, 2007. "On the absorbability of herd behaviour and informational cascades: an experimental analysis," Dresden Discussion Paper Series in Economics 15/07, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    11. Feri, Francesco & Meléndez-Jiménez, Miguel A. & Ponti, Giovanni & Vega-Redondo, Fernando, 2011. "Error cascades in observational learning: An experiment on the Chinos game," Games and Economic Behavior, Elsevier, vol. 73(1), pages 136-146, September.
    12. Vincent Mak & Rami Zwick, 2014. "Experimenting and learning with localized direct communication," Experimental Economics, Springer;Economic Science Association, vol. 17(2), pages 262-284, June.
    13. Puput Tri Komalasari & Marwan Asri & Bernardinus M. Purwanto & Bowo Setiyono, 2022. "Herding behaviour in the capital market: What do we know and what is next?," Management Review Quarterly, Springer, vol. 72(3), pages 745-787, September.
    14. Daniel Sgroi, 2003. "The Right Choice at the Right Time: A Herding Experiment in Endogenous Time," Experimental Economics, Springer;Economic Science Association, vol. 6(2), pages 159-180, October.
    15. Georg Weizsacker, 2010. "Do We Follow Others When We Should? A Simple Test of Rational Expectations," American Economic Review, American Economic Association, vol. 100(5), pages 2340-2360, December.

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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