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Performance evaluation and herd behavior in a laboratory financial market

Xiaolan Yang, Mei Gao, Yun Wu and Xuejun Jin

Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), 2018, vol. 75, issue C, 45-54

Abstract: We consider the effect of performance evaluation on the herd behavior of fund managers in a laboratory financial market. Subjects acting as fund managers receive imperfect private information concerning the fundamental value of a stock, which they then trade in sequence with a market maker. When prices are flexible, subjects regard their private information and herd less frequently than when the price is constant. When price is fixed, subjects evaluated by relative performance tend to "go with the flow" to reduce any price deviation from their peers, but when the price is flexible, herd behavior almost disappears under relative performance evaluation as the increasing trading costs squeeze the net profit of follow-up imitators. Overall, the likelihood of rational decisions under relative performance evaluation is higher than under absolute performance evaluation.

Keywords: Herd behavior; Relative performance evaluation; Fund managers; Tournament (search for similar items in EconPapers)
JEL-codes: C91 D82 G10 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.socec.2018.05.001

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