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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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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt6zf5469f.

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Date of creation: 01 Apr 2003
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Handle: RePEc:cdl:ucsbec:qt6zf5469f

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Keywords: informational cascades; herding; contrarians; experiment; internet;

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Find related papers by JEL classification:

• G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
• C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other
• D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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