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Herding in a Laboratory Asset Market with a Rich Action Set

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  • Lora R. Todorova

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Bodo Vogt

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

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    Abstract

    This paper experimentally examines the efficiency of information aggregation in a simple asset market. Traders decide how to allocate an endowment of 1000 eurocent between two assets. Only one asset will be successful and that will pay back the amount invested in it. The experiment carried out here is original in that it considered a very rich action set. We find that when the action set is sufficiently rich, traders' actions, most of the time, perfectly reveal their private information. Further, the participants in the experiment performed probability matching and took such actions, which were broadly consistent with Bayesian learning.

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    File URL: http://www.fww.ovgu.de/fww_media/femm/femm_2012/2012_22.pdf
    File Function: First version, 2011
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    Bibliographic Info

    Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 120022.

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    Length: 31 pages
    Date of creation: Sep 2012
    Date of revision:
    Handle: RePEc:mag:wpaper:120022

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    Related research

    Keywords: information cascade; information aggregation; herding; probability matching; Bayes' rule;

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    References

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    1. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1088-1105, December.
    2. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    3. Mathias Drehmann & Joerg Oechssler & Andreas Roider, 2002. "Herding and Contrarian Behavior in Financial Markets - An Internet Experiment," Finance, EconWPA 0210005, EconWPA.
    4. Marco Cipriani & Antonio Guarino, 2005. "Herd Behavior in a Laboratory Financial Market," American Economic Review, American Economic Association, American Economic Association, vol. 95(5), pages 1427-1443, December.
    5. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, American Finance Association, vol. 25(2), pages 383-417, May.
    6. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, Elsevier, vol. 32(1), pages 23-43, August.
    7. Bondarenko, Oleg & Bossaerts, Peter, 2000. "Expectations and learning in Iowa," Journal of Banking & Finance, Elsevier, Elsevier, vol. 24(9), pages 1535-1555, September.
    8. Forsythe, Robert & Forrest Nelson & George R. Neumann & Jack Wright, 1992. "Anatomy of an Experimental Political Stock Market," American Economic Review, American Economic Association, American Economic Association, vol. 82(5), pages 1142-61, December.
    9. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
    10. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 54(2), pages 581-622, 04.
    11. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, American Economic Association, vol. 88(4), pages 724-48, September.
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