Advanced Search
MyIDEAS: Login to save this paper or follow this series

When Herding and Contrarianism Foster Market Efficiency : A Financial Trading Experiment

Contents:

Author Info

  • Park, Andreas

    (University of Toronto)

  • Sgroi, Daniel

    (University of Warwick)

Abstract

While herding has long been suspected to play a role in financial market booms and busts, theoretical analyses have struggled to identify conclusive causes for the effect. Recent theoretical work shows that informational herding is possible in a market with efficient asset prices if information is bi-polar, and contrarianism is possible with single-polar information. We present an experimental test for the validity of this theory, contrasting with all existing experiments where rational herding was theoretically impossible and subsequently not observed. Overall we observe that subjects generally behave according to theoretical predictions, yet the fit is lower for types who have the theoretical potential to herd. While herding is often not observed when predicted by theory, herding (sometimes irrational) does occur. Irrational contrarianism in particular leads observed prices to substantially differ from the efficient benchmark. Alternative models of behavior, such as risk aversion, loss aversion or error correction, either perform quite poorly or add little to our understanding.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_854.pdf
Download Restriction: no

Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 854.

as in new window
Length: 48 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:wrk:warwec:854

Contact details of provider:
Postal: CV4 7AL COVENTRY
Phone: +44 (0) 2476 523202
Fax: +44 (0) 2476 523032
Web page: http://www2.warwick.ac.uk/fac/soc/economics/
More information through EDIRC

Related research

Keywords: Herding ; Informational Efficiency ; Experiments;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2002. "Herding and Contrarian Behavior in Financial Markets - An Internet Experiment," Bonn Econ Discussion Papers, University of Bonn, Germany bgse25_2002, University of Bonn, Germany, revised Apr 2003.
  2. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198296980, October.
  3. Park, A. & Sabourian, H., 2009. "Herding and Contrarian Behaviour in Financial Markets," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0939, Faculty of Economics, University of Cambridge.
  4. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, Springer, vol. 5(4), pages 297-323, October.
  5. Jonathan Alevy & Michael Haigh & John List, 2005. "Information cascades: Evidence from a field experiment with financial market professionals," Framed Field Experiments, The Field Experiments Website 00116, The Field Experiments Website.
  6. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, Elsevier, vol. 10(1), pages 6-38, July.
  7. Marco Cipriani & Antonio Guarino, . "Herd Behavior and Contagion in Financial Markets," Working Papers, The George Washington University, Institute for International Economic Policy 2010-01, The George Washington University, Institute for International Economic Policy.
  8. Smith, L. & Sorensen, P., 1996. "Pathological Outcomes of Observational Learning," Economics Papers 115, Economics Group, Nuffield College, University of Oxford.
  9. V. V. Chari & Patrick J. Kehoe, 2003. "Financial crises as herds: overturning the critiques," Staff Report, Federal Reserve Bank of Minneapolis 316, Federal Reserve Bank of Minneapolis.
  10. Marco Cipriani & Antonio Guarino, 2005. "Herd Behavior in a Laboratory Financial Market," Experimental, EconWPA 0502002, EconWPA.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Asen Ivanov & Dan Levin & James Peck, 2008. "Hindsight, Foresight, and Insight: An Experimental Study of a Small-Market Investment Game with Common and Private Values," Working Papers, VCU School of Business, Department of Economics 0801, VCU School of Business, Department of Economics.
  2. Park, Andreas & Sgroi, Daniel, 2008. "Herding and Contrarianism in a Financial Trading Experiment with Endogenous Timing," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 868, University of Warwick, Department of Economics.
  3. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wrk:warwec:854. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helen Neal).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.