Working Papers - details - WEF0047
Herd Behavior in Financial Markets: An
Experiment with Financial Market
Professionals
Marco Cipriani, Antonio Guarino
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Abstract
We study herd behavior in a laboratory financial market with fi
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 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 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 treatments, in contrast with what theory predicts, subjects sometimes
prefer to abstain from trading, which a¤ects the process of price discovery negatively.