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Information Cascades: Evidence from An Experiment with Financial Market Professionals

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  • Jonathan E. Alevy
  • Michael S. Haigh
  • John List

Abstract

Previous empirical studies of information cascades use either naturally occurring data or laboratory experiments with student subjects. We combine attractive elements from each of these lines of research by observing market professionals from the Chicago Board of Trade (CBOT) in a controlled environment. As a baseline, we compare their behavior to student choices in similar treatments. We further examine whether, and to what extent, cascade formation is influenced by both private signal strength and the quality of previous public signals, as well as decision heuristics that differ from Bayesian rationality. Analysis of over 1,500 individual decisions suggests that CBOT professionals are better able to discern the quality of public signals than their student counterparts. This leads to much different cascade formation. Further, while the behavior of students is consistent with the notion that losses loom larger than gains, market professionals are unaffected by the domain of earnings. These results are important in both a positive and normative sense.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12767.

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Date of creation: Dec 2006
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Publication status: published as Jonathan E. Alevy & Michael S. Haigh & John A. List, 2007. "Information Cascades: Evidence from a Field Experiment with Financial Market Professionals," Journal of Finance, American Finance Association, vol. 62(1), pages 151-180, 02.
Handle: RePEc:nbr:nberwo:12767

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Cited by:
  1. List John A., 2007. "Field Experiments: A Bridge between Lab and Naturally Occurring Data," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 5(2), pages 1-47, April.
  2. Levitt, Steven D. & List, John A., 2009. "Field experiments in economics: The past, the present, and the future," European Economic Review, Elsevier, Elsevier, vol. 53(1), pages 1-18, January.
  3. Drehmann, Mathias & Oechssler, Jörg & Roider, Andreas, 2005. "Herding With and Without Payoff Externalities - An Internet Experiment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5310, C.E.P.R. Discussion Papers.

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