Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

Mathias Drehmann, Jörg Oechssler and Andreas Roider ()

Bonn Econ Discussion Papers from University of Bonn, Germany

Abstract: We report results of an internet experiment designed to test the theory of informational cascades in financial markets (Avery and Zemsky, AER, 1998). 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 report some interesting differences with respect to subjects' fields of study.

Keywords: herd behavior; informational cascades; contrarian investors; market efficiency; internet experiment (search for similar items in EconPapers)
JEL-codes: C99 D8 G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-cfn, nep-fin and nep-fmk
Date: 2002-10, Revised 2003-04

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ftp://web.bgse.uni-bonn.de/pub/RePEc/bon/bonedp/bgse25_2002.pdf (application/pdf)

Related works:
Working Paper: Herding and Contrarian Behavior in Financial Markets: An Internet Experiment (2003)
Working Paper: Herding and Contrarian Behavior in Financial Markets - An Internet Experiment (2002)
Working Paper: Herding and Contrarian Behavior in Financial Markets - An Internet Experiment (2004)
Working Paper: Herding and Contrarian Behavior in Financial Markets - An Internet Experiment (2002)
Working Paper: Herding and Contrarian Behavior in Financial Markets - An Internet Experiment (2003)
Working Paper: Herding and Contrarian Behavior in Financial Markets - An Internet Experiment (2004)
Journal Article: Herding and Contrarian Behavior in Financial Markets: An Internet Experiment (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:bon:bonedp:bgse25_2002

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