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Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

Author

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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.

Suggested Citation

  • Roider, Andreas & Mathias Drehmann & Jorg Oechssler, 2003. "Herding and Contrarian Behavior in Financial Markets - An Internet Experiment," Royal Economic Society Annual Conference 2003 177, Royal Economic Society.
    • Handle: RePEc:ecj:ac2003:177
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    JEL classification:

    • C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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