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Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

By Mathias Drehmann, Jörg Oechssler and Andreas Roider


Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004We report results of an internet experiment designed to test the theory of informational cascades in financial markets (Avery and Zemsky, AER, 1998). More than 6400 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 report some interesting differences with respect to subjects’ fields of study. Reassuringly, the behavior of the consultants turns out to be not significantly different from the remaining subjects.

Topics: Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, A5 - Unvollständige Vertragsbeziehungen und die Gestaltung von Residualrechten, C4 - Experimentelle Analyse von rationalen und beschränkt rationalen Theorien des Marktverhaltens, ddc:330
Year: 2004
DOI identifier: 10.2139/ssrn.650462
OAI identifier:
Provided by: Open Access LMU

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