Information Cascades With Financial Market Professionals: An Experimental Study

In settings where there is imperfect information about an underlying state of nature, but where inferences are made sequentially and are publicly observable, information cascades can lead to rational herding. Cascade phenomena may be seen in a variety of areas including technology adoption, financial market behavior, as well as in social processes such as mate selection or fads and fashions. Theories of rational herding have found a natural testing ground in experimental environments since the character of private and public information can be readily controlled. In previous experimental studies, behavior consistent with Bayesian benchmarks has been observed in simple contexts, but there are substantial reductions in experimental environments that introduce relevant complications such as costly information. In this paper we make use of a unique subject pool, that of financial market professionals from the floor of the Chicago Board of Trade, to investigate the role of market experience on herding behavior. We find that market professionals behave differently than a control group of college student subjects. In particular the Bayesian behavior of those with market experience does not differ significantly across the gain and loss domains. Cascade formation also differs across the subject pools with market professionals entering fewer reverse cascades.