Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals

Antonio Guarino and Marco Cipriani

No 47, WEF Working Papers from ESRC World Economy and Finance Research Programme, Birkbeck, University of London

Abstract: We study herd behavior in a laboratory ?nancial market with ?- nancial market professionals. An important novelty of the experi- mental design is the use of a strategy-like method. This allows us to detect herd behavior directly by observing subjects?decisions for all realizations of their private signal. In the paper, we compare two treatments - one in which the price adjusts to the order ?ow in such a way that herding should never occur, and one in which the presence of event uncertainty makes herding possible. In the ?rst treatment, traders herd seldom, in accordance with both the theory and previous experimental evidence on student subjects. A proportion of traders, however, engage in contrarianism, something not accounted for by the theory. In the second treatment, on the one hand, the proportion of herding decisions increases, but not as much as the theory would sug- gest; on the other hand, contrarianism disappears altogether. In both treatments, in contrast with what theory predicts, subjects sometimes prefer to abstain from trading, which a¤ects the process of price discovery negatively.

Date: 2008-02
New Economics Papers: this item is included in nep-cbe and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.worldeconomyandfinance.org/working_pape ... per_PDFs/WEF0047.pdf (application/pdf)

Related works:
Journal Article: Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals (2009)
Working Paper: Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals (2008)
Working Paper: Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wef:wpaper:0047

Access Statistics for this paper

More papers in WEF Working Papers from ESRC World Economy and Finance Research Programme, Birkbeck, University of London Contact information at EDIRC.
Bibliographic data for series maintained by Tim Byne ( this e-mail address is bad, please contact ).