Financial Incentives and Herding: Evidence from Two Online Experiments

Syon Bhanot and Charles Williamson

Southern Economic Journal, 2020, vol. 86, issue 4, 1559-1575

Abstract: Social conformity and information‐based herding have been studied extensively in the social sciences, but there is little experimental evidence on how financial incentives impact the likelihood that an individual will follow the crowd. We present the results of a pair of two‐stage online experiments where we use answers to and confidence about trivia questions—with and without information about the choices of others—to test the impact of financial incentives on an individual's likelihood of engaging in herd behavior (i.e., switching their answer to the most popular answer when it is revealed). We find strong evidence that individuals are more likely to herd when there are financial incentives to be correct, suggesting that individuals are less likely to rely on their own beliefs and judgments when the stakes are higher. We also exploit the unique design of our experiments to show that in the absence of information about others' choices, men report higher levels of confidence than women.

Date: 2020
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https://doi.org/10.1002/soej.12427

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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:86:y:2020:i:4:p:1559-1575

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