An Experimental Study of Herding and Contrarian Behavior among Financial Investors (original) (raw)

Herd Behavior in a Laboratory Financial Market

American Economic Review, 2005

We study herd behavior in a laboratory financial market. Subjects receive private information on the fundamental value of an asset and trade it in sequence with a market maker. The market maker updates the asset price according to the history of trades. Theory predicts that agents should never herd. Our experimental results are in line with this prediction. Nevertheless, we observe a phenomenon not accounted for by the theory. In some cases, subjects decide not to use their private information and choose not to trade. In other cases, they ignore their private information to trade against the market (contrarian behavior). (

Herding and price convergence in a laboratory financial market

2002

We study whether herding can arise in a laboratory financial mar-ket in which agents trade sequentially. Agents trade an asset whose value is unknown and whose price is efficiently set by a market maker. We show that the presence of a price mechanism destroys the ...

Herd Behavior in Financial Markets

2001

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one." Charles Mackay

Impacts of Personality on Herding in Financial Decision-Making

Experimental analyses have identified significant tendencies for individuals to follow herd decisions, a finding which has been explained using Bayesian principles of statistical inference. This paper outlines the results from a herding task designed to extend these analyses. Empirically, we estimate logistic functions using panel fixed effect estimation techniques to quantify the impact of herd decisions on individuals' decisions about whether or not to buy a financial asset. We confirm that there are statistically significant propensities to herd and that social information about others' decisions has an impact on individuals' decisions. We extend these findings by identifying associations between herding propensities and individual characteristics such as gender, age and specific personality traits including impulsivity and venturesomeness.

Herd Behavior Among Hedge Funds and Its Effects on Funds' Returns and Survival Profiles

Herd behavior, the broad tendency to think, act and make decisions based on thoughts, actions and observable decisions of others, is common in social situations. In financial economics, it is often examined in the stock market: institutional investors like mutual funds, and retail investors alike exhibit herd behavior by buying (selling) stocks that other investors of their type are also buying (selling). Less widely understood is the level of herd trading among hedge funds. In this paper, I explored the possible presence of herding among hedge funds between 1999-2016. Then, I tested whether such herd decisions are optimal investment decisions, i.e. drive returns of the current and next quarter for these funds. Finally, I examined whether hedge funds that herded more existed for longer during the observational window than those that herded to a lesser extent. My findings showed that there was indeed evidence for herding among hedge funds—other funds' positions on a stock during a given quarter explained an individual fund's position on that stock more so than that stock's returns and momentum did. ​ There is a general increase in funds' current-quarter risk adjusted returns with a move towards lower levels of herding, but that relationship is less strong when considering next-quarter returns. Lastly, a higher tendency to herd did worsen funds' survival profiles during the observational period. My estimates are statistically significant, and while estimates of herding are not economically significant, estimates of herding survival stratified by herding levels are. Nguyen 1

Herding in Financial Behaviour: A Behavioural and Neuroeconomic Analysis of Individual Differences

Experimental analyses have identified significant tendencies for individuals to follow herd decisions, a finding which has been explained using Bayesian principles. This paper outlines the results from a herding task designed to extend these analyses using evidence from a functional magnetic resonance imaging (fMRI) study. Empirically, we estimate logistic functions using panel estimation techniques to quantify the impact of herd decisions on individuals' financial decisions. We confirm that there are statistically significant propensities to herd and that social information about others' decisions has an impact on individuals' decisions. We extend these findings by identifying associations between herding propensities and individual characteristics including gender, age and various personality traits. In addition fMRI evidence shows that individual differences correlate strongly with activations in the amygdala – an area of the brain commonly associated with social deci...

Herding, information uncertainty and investors' cognitive profile

Qualitative Research in Financial Markets, 2011

... Valle Santos, University of Valladolid, Valladolid, Spain. ... Rational investors combine different sources of information using Bayes rule: the weights placed on the different pieces of information should be proportional to their respective accuracy (Daniel and Titman, 1999). ...

Exploring the Herding Behaviour in Indian Mutual Fund Industry

Asian Journal of Finance & Accounting, 2012

The present study analyzes the trading activity of Indian mutual funds and investigates whether Indian mutual fund managers are engaged in herding behaviour. Results are compared with previous studies in mature as well as developing markets to determine the level of maturity of the Indian capital market. Measure of herding developed by Lakonishok et al. (1992) has been used. The study found strong evidence of herding in the overall sample. Managers herd primarily when they trade in large capitalization stocks or stocks that belong to the most famous indices. The herding effect seems to affect both purchases and sales of stocks. The level of herding is more in Indian stock market as compared to developed markets. Furthermore, the Indian mutual funds tend to herd more often when purchasing than when selling a stock, and when trading large stocks. The study will contribute to the discussion regarding market efficiency and traditional asset pricing models validity. Evidence on herding by institutional investors, could explain whether there are different types of 190 investors having different trading pattern. Investigating herding on Indian mutual funds would help researchers, investors, traders and regulators.

Transaction costs and informational cascades in financial markets

Journal of Economic Behavior & Organization, 2008

We study the effect of transaction costs (eg, a trading fee or a transaction tax, like the Tobin tax) on the aggregation of private information in financial markets. We implement a financial market with sequential trading and transaction costs in the laboratory. According to theory, ...