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Do Markets Drive Out Lemmings-or Vice Versa?

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Author Info
John D. Hey
Andrea Morone

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Abstract

This paper investigates experimentally a market inspired by two strands of literature: on herd behaviour in non-market situations, and on the aggregation of private information in markets. The first strand suggests that socially undesirable herd behaviour may result when information is private; the second suggests that in a market context the price mechanism may cause the private information to be aggregated correctly and efficiently. This latter therefore suggests that socially undesirable behaviour may be eliminated through the market. We test this experimentally, and find that socially undesirable behaviour may result: the market is misled by agents privately optimizing. Copyright (c) The London School of Economics and Political Science 2004.

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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 71 (2004)
Issue (Month): 284 (November)
Pages: 637-659
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Handle: RePEc:bla:econom:v:71:y:2004:i:284:p:637-659

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  1. Annamaria Fiore & Andrea Morone, 2005. "Is playing alone in the darkness sufficient to prevent informational cascades?," Experimental 0503002, EconWPA. [Downloadable!]
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  2. Piergiuseppe Morone, 2004. "Investigating The Effects Of Information On Income Distribution Using Experimental Data," Experimental 0407005, EconWPA. [Downloadable!]
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  3. Fiore, Annamaria & Morone, Andrea, 2008. "A Simple Note on Informational Cascades," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(1), pages 1-21. [Downloadable!]
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  4. Beckmann, Daniela & Menkhoff, Lukas & Sawischlewski, Katja, 2005. "Robust Lessons about Practical Early Warning Systems," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-322, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  5. Giovanni Ferri & Andrea Morone, 2008. "The Effect of Rating Agencies on Herd Behaviour," EERI Research Paper Series EERI_RP_2008_21, Economics and Econometrics Research Institute (EERI). [Downloadable!]
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  6. Filippin, Antonio, 2003. "Discrimination and Workers' Expectations: Experimental Evidence," IZA Discussion Papers 824, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. Meroz, Yael & Morone, Andrea & Morone, Piergiuseppe, 2009. "Eliciting environmental preferences of Ghanaians in the laboratory: An incentive-compatible experiment," MPRA Paper 17107, University Library of Munich, Germany. [Downloadable!]
  8. Morone, Andrea & Fiore, Annamaria & Sandri, Serena, 2008. "On The Absorbability Of Herd Behaviour And Informational Cascades: An Experimental Analysis," MPRA Paper 6884, University Library of Munich, Germany. [Downloadable!]
  9. Mathias Drehmann & Joerg Oechssler & Andreas Roider, 2003. "Herding and Contrarian Behavior in Financial Markets: An Internet Experiment," University of California at Santa Barbara, Economics Working Paper Series 18-03, Department of Economics, UC Santa Barbara. [Downloadable!]
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  10. Andrea Morone & Eleni Samanidou, 2008. "A simple note on herd behaviour," Journal of Evolutionary Economics, Springer, vol. 18(5), pages 639-646, October. [Downloadable!] (restricted)
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  11. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany. [Downloadable!]
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