Portfolio diversification: An experimental study

The paper analyses on an experimental basis the phenomenon of non-optimal under-diversification in portfolio choice decisions and investigates the reasons behind it. The most important obstacles for optimal diversification are studied the correlation neglect hypothesis and the overconfidence which both lead to suboptimal diversification decisions. The investment alternatives are constructed in a way that the Markowitz' efficiency frontier is reduced to a single point in the return-risk diagram so that unambiguous interpretation of the results is possible: the subjects neglect the correlation between the assets, use naïve diversification strategies and take irrelevant information as a foundation for their investment decisions, the first effect being stronger than the second

Informational Cascades: A Mirage?

Experimental research found contradictory results regarding the occurrence of informational cascades. Whereas Anderson and Holt (1997) confirmed the model of Banerjee (1992), and Bikhchandani et al. (1992) through lab tests, Huck and Oechssler (2000) came to contradictory results on crucial issues. This article presents experimental evidence supporting further doubts concerning "Bayesian" informational cascades: Just under two thirds of all decisions are characterized by an excessive orientation towards the private signal, and only a small number of the subjects (<6%) make rational decisions systematically and consistently

Network centrality and stock market volatility: The impact of communication topologies on prices

We investigate the impact of agent communication networks on prices in an artificial stock market. Networks with different centralization measures are tested for their effect on the volatility of prices. Trading strategies diffuse through the different network topologies, mimetic contagion arises through the adaptive behavior of the heterogeneous agents. Short trends may trigger cascades of buy and sell orders due to increased diffusion speed within highly centralized communication networks. Simulation results suggest a correlation between the network centralization measures and the volatility of the resulting stock prices

The status quo bias of bond market analysts

Status quo bias is a systematic cognitive error which makes it difficult for individuals to make decisions independently of the currently dominant situation. This study pursues the question of whether bond market analysts are affected by status quo bias. We evaluated interest rate forecast series from twelve industrial nations. This revealed that, on average, forecasts were much too close to the status quo - the current interest rate at the time when the forecast was made. With the aid of various analytical procedures it can be shown that the actual extent of interest rate changes is systematically and significantly underestimated

Informational Cascades: Erklärung für rationales Herdenverhalten oder nur eine Fata Morgana?

"Experimental research found contradictory results regarding the occurrence of Informational Cascades. While Anderson and Holt (1997) through lab tests confirm the model of Banerjee (1992), and Bikhchandani, Hirshleifer, and Welch (1992) resp., Huck and Oechssler (2000) come to controversial results for crucial issues. This study is an extensive (227 test persons) and as regards contents expanded repetition. It becomes obvious that less than 10% of subjects are able to make deductions from predecessors' actions regarding their private signals, to consider the reliability of the signals and the a priory probability, to accurately use Bayes' Rule, and to thus reach rational decisions." (author's abstract)In Bezug auf das Auftreten von Informational Cascades ist die empirische Forschung zu widersprüchlichen Ergebnissen gekommen. Anderson und Holt (1997) bestätigen das Modell von Banerjee (1992) experimentell, Bikhchandani, Hirshleifer und Welch (1992) ebenso, Huck und Oechssler (2000) kommen in Schlüsselfragen zu anderen Ergebnissen. Diese Studie ist eine umfangreiche (n=227) und erweiterte Replikation. Es wird offensichtlich, dass weniger als 10% der Personen in der Lage sind, aus den Handlungen ihrer Vorläufer in Bezug auf deren private Signale Schlussfolgerungen zu ziehen, die Zuverlässigkeit der Signale und ihre a priori-Wahrscheinlichkeit zu beurteilen, Bayes' Gesetz akkurat anzuwenden und so zu einer rationalen Entscheidung zu kommen. (ICEÜbers

Rationales Herdenverhalten bei US-amerikanischen Rentenmarkt-Analysten: Verhaltensabstimmung durch ein externes Signal

"Experimental research found contradictory results regarding the occurrence of informational cascades. Whereas Anderson and Holt (1997) confirmed the model of Banerjee (1992), and Bikhchandani, Hirshleifer, and Welch (1992) through lab tests, Huck and Oechssler 2000) came to controversial results for crucial issues. This study is an extensive (227 test persons) - and as regards contents - expanded repetition. In conclusion, less than 10% of subjects are able to make deductions about predecessors’ private signals from their actions, to consider the reliability of the signals and the a priori probability, to accurately use Bayes’ Rule, and to thus reach rational decisions." (author's abstract