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Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

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  • Roider, Andreas

    (University of Bonn)

  • Mathias Drehmann
  • Jorg Oechssler

Abstract

We report results of an internet experiment designed to test the theory of informational cascades in financial markets. 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 look at the behavior of various subsamples of our heterogeneous subject pool.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 177.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:177

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Postal: Office of the Secretary-General, School of Economics and Finance, University of St. Andrews, St. Andrews, Fife, KY16 9AL, UK
Phone: +44 1334 462479
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Web page: http://www.res.org.uk/society/annualconf.asp
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Keywords: herd behavior; informational cascades; contrarian investors; market efficiency; internet experiment;

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References

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