A Social-Psychological Perspective on Herding in Stock Markets

Maria Andersson, Martin Hedesström and Tommy Gärling

Journal of Behavioral Finance, 2014, vol. 15, issue 3, 226-234

Abstract: A social-psychological perspective conceives of herding in stock markets as informative social influence resulting from heuristic or systematic information processing. In three laboratory experiments employing undergraduates we apply this perspective to investigate factors that prevent herd influence that would lead to inaccurate predictions of stock prices. In Experiment 1, we show that an economic reward for making the same predictions as the herd increases the influence of a majority but not the influence of a minority, and that an individual economic reward for making accurate predictions reduces the influence of the majority. In Experiment 2, we show a reduced influence of a majority herd's inaccurate predictions when requiring assessments of the accuracy of the majority herd´s predictions as compared to requiring judgments of their consistency. Experiment 3 shows that a lower volatility of stock prices reduces the influence of a majority herd´s inaccurate predictions.

Date: 2014
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DOI: 10.1080/15427560.2014.941062

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