Advanced Search
MyIDEAS: Login to save this paper or follow this series

Herding in Financial Behaviour: A Behavioural and Neuroeconomic Analysis of Individual Differences

Contents:

Author Info

  • Baddeley, M.
  • Burke, C.
  • Schultz, W.
  • Tobler, P.

Abstract

Experimental analyses have identified significant tendencies for individuals to follow herd decisions, a finding which has been explained using Bayesian principles. This paper outlines the results from a herding task designed to extend these analyses using evidence from a functional magnetic resonance imaging (fMRI) study. Empirically, we estimate logistic functions using panel estimation techniques to quantify the impact of herd decisions on individuals' financial decisions. We confirm that there are statistically significant propensities to herd and that social information about others' decisions has an impact on individuals' decisions. We extend these findings by identifying associations between herding propensities and individual characteristics including gender, age and various personality traits. In addition fMRI evidence shows that individual differences correlate strongly with activations in the amygdala – an area of the brain commonly associated with social decision-making. Individual differences also correlate strongly with amygdala activations during herding decisions. These findings are used to construct a two stage least squares model of financial herding which confirms that individual differences and neural responses play a role in modulating the propensity to herd.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1225.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1225.

as in new window
Length:
Date of creation: 09 May 2012
Date of revision:
Handle: RePEc:cam:camdae:1225

Contact details of provider:
Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: herding; social influence; individual differences; neuroeconomics; fMRI; amygdala;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Colin F. Camerer, 2007. "Neuroeconomics: Using Neuroscience to Make Economic Predictions," Economic Journal, Royal Economic Society, vol. 117(519), pages C26-C42, 03.
  2. Brock, William A. & Durlauf, Steven N., 2001. "Interactions-based models," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 54, pages 3297-3380 Elsevier.
  3. Michelle Baddeley, 2006. "Behind the black box: a survey of real-world investment appraisal approaches," Empirica, Springer, vol. 33(5), pages 329-350, December.
  4. Asen Ivanov & Dan Levin & James Peck, 2008. "Hindsight, Foresight, and Insight: An Experimental Study of a Small-Market Investment Game with Common and Private Values," Working Papers 0801, VCU School of Business, Department of Economics.
  5. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Daniel Sgroi, 2000. "The Right Choice at the Right Time: A Herding Experiment in Endogenous Time," Economics Series Working Papers 2000-W15, University of Oxford, Department of Economics.
  7. Andreas Park & Hamid Sabourian, 2011. "Herding and Contrarian Behavior in Financial Markets," Econometrica, Econometric Society, vol. 79(4), pages 973-1026, 07.
  8. Marco Cipriani & Antonio Guarino, 2005. "Herd Behavior in a Laboratory Financial Market," Experimental 0502002, EconWPA.
  9. Colin F. Camerer & George Loewenstein & Drazen Prelec, 2004. "Neuroeconomics: Why Economics Needs Brains," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 555-579, October.
  10. Elster, Jon, 1996. "Rationality and the Emotions," Economic Journal, Royal Economic Society, vol. 106(438), pages 1386-97, September.
  11. Kirman, Alan, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 137-56, February.
  12. Andrew W. Lo & Dmitry V. Repin & Brett N. Steenbarger, 2005. "Fear and Greed in Financial Markets: A Clinical Study of Day-Traders," NBER Working Papers 11243, National Bureau of Economic Research, Inc.
  13. Bogaçhan Çelen & Shachar Kariv, 2004. "Distinguishing Informational Cascades from Herd Behavior in the Laboratory," American Economic Review, American Economic Association, vol. 94(3), pages 484-498, June.
  14. Baddeley, M. & Pillas, D. & Christopoulos, Y. & Schultz, W. & Tobler, P., 2007. "Herding And Social Pressure In Trading Tasks: A Behavioural Analysis," Cambridge Working Papers in Economics 0730, Faculty of Economics, University of Cambridge.
  15. Mark J. Kamstra & Lisa A. Kramer & Maurice D. Levi, 2003. "Winter Blues: A SAD Stock Market Cycle," American Economic Review, American Economic Association, vol. 93(1), pages 324-343, March.
  16. Salop, Steven C, 1987. "Evaluating Uncertain Evidence with Sir Thomas Bayes: A Note for Teachers," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 155-59, Summer.
  17. Alevy, Jonathan E. & Haigh, Michael S. & List, John A., 2003. "Information Cascades: Evidence From A Field Experiment With Financial Market Professionals," Working Papers 28608, University of Maryland, Department of Agricultural and Resource Economics.
  18. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 841-77, October.
  19. David Hirshleifer & Tyler Shumway, 2003. "Good Day Sunshine: Stock Returns and the Weather," Journal of Finance, American Finance Association, vol. 58(3), pages 1009-1032, 06.
  20. Robert J. Shiller, 1995. "Conversation, Information, and Herd Behavior," Cowles Foundation Discussion Papers 1092, Cowles Foundation for Research in Economics, Yale University.
  21. Camelia Kuhnen & Brian Knutson, 2005. "The Neural Basis of Financial Risk Taking," Experimental 0509001, EconWPA.
  22. Le Bon, Gustave, 1896. "The Crowd, A Study of the Popular Mind," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number lebon1896.
  23. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
  24. Jonathan D. Cohen, 2005. "The Vulcanization of the Human Brain: A Neural Perspective on Interactions Between Cognition and Emotion," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 3-24, Fall.
  25. Anderson, Lisa R & Holt, Charles A, 1997. "Information Cascades in the Laboratory," American Economic Review, American Economic Association, vol. 87(5), pages 847-62, December.
  26. Lisa R. Anderson & Charles A. Holt, 1996. "Classroom Games: Information Cascades," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 187-193, Fall.
  27. Park, A. & Sgroi, D., 2009. "Herding and Contrarian Behavior in Financial Markets: An Experimental Analysis," Cambridge Working Papers in Economics 0938, Faculty of Economics, University of Cambridge.
  28. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  29. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cam:camdae:1225. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Howard Cobb).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.