Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals
IMF Working Papers, June 1, 2008
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Bibliographic details
- Authors: Marco Cipriani, Antonio Guarino
- Published: June 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451869996.001
Summary
- Study of herd behavior in a laboratory financial market with financial market professionals.
- Comparison of two treatments:
- One treatment in which the price adjusts to the order flow so that herding should never occur.
- One treatment in which event uncertainty makes herding possible.
- Main findings:
- In the first treatment, subjects herd seldom, consistent with theory and previous experimental evidence on student subjects.
- A proportion of subjects engage in contrarianism in the first treatment, a behavior not accounted for by the theory.
- In the second treatment, the proportion of herding decisions increases, but not as much as theory suggests.
- Contrarianism disappears altogether in the second treatment.
Experimental design and treatments
- Two treatments contrasted:
- Price-adjustment to order flow treatment (herding should never occur).
- Event-uncertainty treatment (herding possible).
- Subject pool: financial market professionals.
Observations on behavior vs. theory
- Agreement with theory:
- Low incidence of herding in the price-adjustment treatment mirrors theoretical predictions and prior student-based experiments.
- Deviations from theory:
- Presence of contrarianism in the first treatment (unanticipated by theory).
- Increase in herding under event uncertainty is smaller than theory predicts.
- Disappearance of contrarianism under event uncertainty.
IMF Working Paper: "Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals" by Marco Cipriani and Antonio Guarino, June 1, 2008.