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Herding and Contrarianism: A Matter of Preference?

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  • Chad Kendall

    (University of Southern California)

Abstract

Herding and contrarian strategies produce informational inefficiencies when investors ignore private information, instead following or bucking past trends. In a simple market model, I show theoretically that investors with prospect theory preferences generically follow herding or contrarian strategies, but do so because of future returns as opposed to past trends. I conduct a laboratory experiment to test the theory and obtain an estimate of the distribution of preferences in the subject population. I find that approximately 70% of subjects have preferences that induce herding. Using the preference estimates, I quantify informational efficiencies and predict trade behavior in more general environments.

Suggested Citation

  • Chad Kendall, 2023. "Herding and Contrarianism: A Matter of Preference?," The Review of Economics and Statistics, MIT Press, vol. 105(1), pages 190-205, January.
    • Handle: RePEc:tpr:restat:v:105:y:2023:i:1:p:190-205
    DOI: 10.1162/rest_a_01028
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