Herd Behavior in a Laboratory Financial Market

Marco Cipriani () and Antonio Guarino ()

American Economic Review, 2005, vol. 95, issue 5, pages 1427-1443

Abstract: We study herd behavior in a laboratory financial market. Subjects receive private information on the fundamental value of an asset and trade it in sequence with a market maker. The market maker updates the asset price according to the history of trades. Theory predicts that agents should never herd. Our experimental results are in line with this prediction. Nevertheless, we observe a phenomenon not 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).

Date: 2005
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