Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals

Marco Cipriani, Antonio Guarino
2008 IMF Working Papers  
We study herd behavior in a laboratory ...nancial market with ...nancial market professionals. An important novelty of the experimental design is the use of a strategy-like method. This allows us to detect herd behavior directly by observing subjects' decisions for all realizations of their private signal. In the paper, we compare two treatments: one in which the price adjusts to the order ‡ow in such a way that herding should never occur, and one in which the presence of event uncertainty
more » ... nt uncertainty makes herding possible. In the ...rst treatment, traders herd seldom, 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 Cipriani:
doi:10.5089/9781451869996.001 fatcat:jdujfqrqwrcetckeycfcrqubha