Information Cascades: Evidence from An Experiment with Financial Market Professionals

Jonathan E. Alevy (), Michael S. Haigh and John List ()

No 12767, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Previous empirical studies of information cascades use either naturally occurring data or laboratory experiments with student subjects. We combine attractive elements from each of these lines of research by observing market professionals from the Chicago Board of Trade (CBOT) in a controlled environment. As a baseline, we compare their behavior to student choices in similar treatments. We further examine whether, and to what extent, cascade formation is influenced by both private signal strength and the quality of previous public signals, as well as decision heuristics that differ from Bayesian rationality. Analysis of over 1,500 individual decisions suggests that CBOT professionals are better able to discern the quality of public signals than their student counterparts. This leads to much different cascade formation. Further, while the behavior of students is consistent with the notion that losses loom larger than gains, market professionals are unaffected by the domain of earnings. These results are important in both a positive and normative sense.

JEL-codes: G11 G14 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
Date: 2006-12
Note: AP
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