Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

Mathias Drehmann, Jörg Oechssler and Andreas Roider ()

No 7, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

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 6400 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 report some interesting differences with respect to subjects' fields of study. Reassuringly, the behavior of the consultants turns out to be not significantly different from the remaining subjects.

Keywords: informational cascades; herding; contrarians; experiment; internet (search for similar items in EconPapers)
JEL-codes: C92 D8 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp, nep-fin and nep-fmk
Date: 2004-06
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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 (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 (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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