Herding in Financial Markets: Its Causes and Implications (in Korean)

This paper analyses herd behavior related to information flows in order to find its causes and implications for social welfare and policy measures. Main results include the followings: Firstly, those who have lower degree of risk aversion are less likely to follow others' action as they consider more greatly the risk of their utility fluctuation which takes place when they make an action after others. Secondly, when the amount of agents' information is small compared to that of the whole information which includes every factor that determines an event, risk averse agents act cautiously considering the high probability that their decision could be wrong and thus herd behavior is less likely to take place. Thirdly, when information begins to flow among individuals from the situation that information flow is blocked, not only social expected revenue but the volatility of the revenue increases. When less efficient information flows become more efficient, however, social expected revenue increases while the volatility of the revenue decreases enhancing social welfare. Finally, when the public information increases among individuals, herd behavior can lessen as the need for individuals to observe others' action decreases. And when the public information pervades, not just social expected revenue increases but the volatility of the revenue also tends to increases as the possibility that all individuals take wrong decision increases.