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Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

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  • Mathias Drehmann

    (University of Bonn)

  • Joerg Oechssler

    (University of Bonn)

  • Andreas Roider

    (University of Bonn)

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

  • Mathias Drehmann & Joerg Oechssler & Andreas Roider, 2002. "Herding and Contrarian Behavior in Financial Markets - An Internet Experiment," Experimental 0210001, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpex:0210001
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    More about this item

    Keywords

    herd behavior; informational cascades; contrarian investors; market efficiency; internet experiment;

    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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