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Herding and financial panics: a role for cognitive psychology?

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Author Info
H.M. Prast

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Abstract

The purpose of this Research Memorandum is to assess whether concepts from psychological theory may be useful in explaining herding and crises in financial markets. The conclusion is that the theory of cognitive dissonance, which assumes that the human brain seeks and processes information in a biased way, seems to be able to explain both phenomena. A possible policy implication is, that intensive and careful information dissemination may be important both for socially optimal investor behaviour and in creating financial stability.

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File URL: http://www.dnb.nl/binaries/wo0611_tcm46-145928.pdf
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Publisher Info
Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 611.

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Date of creation: 2000
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Handle: RePEc:dnb:wormem:611

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Related research
Keywords: herding; financial crises; psychology; information processing; cognitive dissonance;

Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F30 - International Economics - - International Finance - - - General
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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This page was last updated on 2010-1-2.

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