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Herd Behavior in a Laboratory Financial Market

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  • Marco Cipriani
  • Antonio Guarino

Abstract

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).

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282805775014443
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 5 (December)
Pages: 1427-1443

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:5:p:1427-1443

Note: DOI: 10.1257/000282805775014443
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References

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  5. Marco Cipriani & Antonio Guarino, . "Herd Behavior and Contagion in Financial Markets," Working Papers 2010-01, The George Washington University, Institute for International Economic Policy.
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