Skip to main content
Article thumbnail
Location of Repository

Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

By Mathias Drehmann, Joerg Oechssler and Andreas Roider

Abstract

We report results of an internet experiment designed to test the theory of informational cascades in financial markets. 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 look at the behavior of various subsamples of our heterogeneous subject pool.herd behavior, informational cascades, contrarian investors, market efficiency, internet experiment

OAI identifier:

Suggested articles

Citations

  1. (1999). 52N a g e l ,R . ,A .B o s c h ,J .M o n t a l v o ,and A. Satorra
  2. (1997). A n d e r s o n ,L .R . ,and
  3. (2002). A Survey of Behavioral Financeforthcoming.
  4. (1998). Are More Informed Agents Able to Shatter Information Cascades
  5. (2001). Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding.O x f o r dU n i v e r -sity Press,
  6. (1983). Bank Runs, Deposit Insurance and Liquidity,”
  7. (1985). Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders,”
  8. (1998). Contrarian Investment Strategies: The Next Generation. Simon and Schuster,
  9. (1979). Contrarian Investment Strategy.
  10. (1994). Contrarian Investment, Extrapolations, and Risk,”
  11. (2001). Design and Evaluation of an
  12. (2002). Do Markets Drive Out Lemmings - or Vice Versa?,” mimeo.
  13. (2001). Does Cascade Behavior in Information Cascades Reflect Bayesian Updating? An Experimental Study,” mimeo.
  14. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work,”
  15. (1995). Experimental Asset Markets: A Survey,”
  16. (1987). Further Evidence on Investor over-Reaction and Stock Market Seasonality,”
  17. (1997). Good News for Value Stocks: Further Evidence on Market Efficiency,”
  18. (2002). H o m m e s ,C .
  19. (2002). Herd Behavior and Cascading in Capital Markets: A Review and Synthesis,” European Financial
  20. (2000). Herd Behavior in Financial Markets: A Review,” IMF Policy Working Papers WP/00/48.
  21. (1999). Herding Among Investment Newsletters: Theory and Evidence,”
  22. (2000). Herding Among Security Analysts,”
  23. (2002). Herding and Price Convergence in a Laboratory Financial Market,” mimeo,
  24. (2001). Information Cascades: Replication and an Extension to Majority Rule and Conformity Rewarding
  25. (1998). Information Externalities and Learning with Sequential Interactions,”
  26. (2000). Informational Cascades in the Laboratory: Do They Occur for the Right Reasons?,”
  27. (2001). Investor Psychology and Asset Pricing,”
  28. (2002). Investor Psychology in Capital Markets: Evidence and Policy Implications,”
  29. (1998). Market Crashes and Informational Avalanches,”
  30. (1998). Multidimensional Uncertainty and Herd Behavior in
  31. N¨ o t h ,M . ,C .F .C a m e r e r ,C .R .P l o t t ,and M. Weber (2001): “Information Aggregation in Experimental Asset Markets: Traps and Misaligned Beliefs,” mimeo.
  32. (1997). Noise Trading, Delegated Portfolio Management,
  33. (1997). Parimutuel Betting Markets as Information Aggregation Devices: Experimental Results,” Social Science Working Paper 986,
  34. (1990). Partially-Revealing Rational Expectations Equilibria in a Competitive Economy,”
  35. (1995). Quantal Response Equilibria for
  36. (1997). Quantal Response Equilibria for Extensive Form Games,”
  37. (1999). Rational Behavior Vs. Herd Behavior: Theoretical and Experimental Analysis,” mimeo.
  38. (1992). Sequential Sales, Learning,
  39. (2001). Social Distance and Reciprocity: The Internet Vs. The Laboratory,” mimeo.
  40. (1953). The Case for Flexible Exchange Rates,” in Essays in Positive Economics.
  41. (1999). The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework,”
  42. (1994). The Vanishing Marginals,
  43. (2000). Two Experiments to Test a
  44. (1999). Using Field Experiments to Test Equivalence Between Auction Formats:
  45. (2002). Webgames and Strategy: Recipes for Interactive Learning,” mimeo.
  46. (1999). Wishes, Expectations a n dA c t i o n s :AS u r v e yo nP r i c eF o r m a t i o ni nE l e c t i o nS t o c kM a r k e t s ,

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.