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Herd behavior in financial markets: a field experiment with financial market professionals

Cipriani, M.; Guarino, A.; (2007) Herd behavior in financial markets: a field experiment with financial market professionals. (ELSE Working Papers 272). ESRC Centre for Economic Learning and Social Evolution: London, UK. Green open access

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Abstract

We study herd behavior in a laboratory financial market with financial market professionals. We compare two treatments: one in which the price adjusts to the order flow in such a way that herding should never occur, and one in which the presence of event uncertainty makes herding possible. In the first treatment, traders seldom herd, in accordance with both the theory and previous experimental evidence on student subjects. A proportion of traders, however, engage in contrarianism, something not accounted for by the theory. In the second treatment, on the one hand, the proportion of herding decisions increases, but not as much as the theory would suggest; on the other hand, contrarianism disappears altogether. In both treatments, in contrast with what theory predicts, subjects sometimes prefer to abstain from trading, which affects negatively the process of price discovery.

Type: Working / discussion paper
Title: Herd behavior in financial markets: a field experiment with financial market professionals
Open access status: An open access version is available from UCL Discovery
Publisher version: http://else.econ.ucl.ac.uk/newweb/papers.php#2007
Language: English
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/14427
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