## 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

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### 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.*

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