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Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

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  • Mathias Drehmann
  • Jörg Oechssler
  • Andreas Roider

Abstract

We report results of an internet experiment designed to test the theory of informational cascades in financial markets (Avery and Zemsky, AER, 1998). More than 6000 subjects, including a subsample of 267 consultants from an international consulting firm, participated in the experiment. As predicted by theory, we find that the presence of a flexible market price prevents herding. However, the presence of contrarian behavior, which can (partly) be rationalized via error models, distorts prices, and even after 20 decisions convergence to the fundamental value is rare. We also study the effects of transaction costs and the expectations of subjects with respect to future prices. Finally, we report some interesting differences with respect to subjects' fields of study.

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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse25_2002.

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Length: 56
Date of creation: Oct 2002
Date of revision: Apr 2003
Handle: RePEc:bon:bonedp:bgse25_2002

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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Keywords: herd behavior; informational cascades; contrarian investors; market efficiency; internet experiment;

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References

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