Abstract:In settings characterized by imperfect information about an underlying state of nature, but where inferences are made sequentially and are publicly observable, decisions may yield a "cascade" in which everyone herds on a single choice. While cascades potentially play a role in a variety of settings, from technology adoption to social processes such as mate selection, understanding cascade phenomena is imperative for financial markets. Previous empirical efforts studying cascade formation have used both naturally occurring data and laboratory experiments. In this paper, we combine two of the attractive elements of each line of research-observation of Chicago Board of Trade market professionals in a controlled environment-to push the investigation of cascade behavior into several new directions. Numerous empirical insights are obtained; perhaps most importantly we find that market professionals behave quite differently than a control group of college student subjects. In particular, the market professionals base their decisions on the "quality" of the public signal to a greater extent than do students, leading professionals to be more likely to disregard "bad" signals. And, unlike in the case with students, for market professionals, the propensity to be Bayesian does not differ significantly across the gain and loss domains.

A pillar of behavioral research is that preferences are constructed during the process of choice. A prominent finding is that uninformative numerical “anchors” influence judgment and valuation. It remains unclear whether such processes influence market equilibria. We conduct two experiments that extend the study of anchoring to field settings. The first experiment produces evidence that some consumers' valuations can be anchored in novel situations; there is no evidence that experienced agents are influenced by anchors. The second experiment finds that anchors have only transient effects on market outcomes that converge to equilibrium predictions after a few market periods. (JEL C93, D11)

Previous empirical studies of information cascades use either naturally occurring data or laboratory experiments with student subjects. We combine attractive elements from each of these lines of research by observing market professionals from the Chicago Board of Trade (CBOT) in a controlled environment. As a baseline, we compare their behavior to student choices in similar treatments. We further examine whether, and to what extent, cascade formation is influenced by both private signal strength and the quality of previous public signals, as well as decision heuristics that differ from Bayesian rationality. Analysis of over 1,500 individual decisions suggests that CBOT professionals are better able to discern the quality of public signals than their student counterparts. This leads to much different cascade formation. Further, while the behavior of students is consistent with the notion that losses loom larger than gains, market professionals are unaffected by the domain of earnings. These results are important in both a positive and normative sense. Since the private information of cascade followers is not revealed, information cascades can be suboptimal. Moreover, because the small amount of information revealed early in a sequence has a large impact on social welfare, cascades can be fragile, with abrupt shifts or reversals in direction when new information becomes available (Bikhchandani, Hirshleifer, andWelch (1992, 1998; hereafter BHW), Gale (1996), Goeree et al. (2004)). Indeed, some argue that the volatility induced by herding behavior can increase the fragility of financial markets and destabilize the broader market system (Eichengreen et al. (1998), Bikhchandani and Sharma (2000), Chari and Kehoe (2004)).Previous empirical approaches that examine cascade behavior can be divided into two classes; regression-based tests that use naturally occurring data and laboratory experiments that use data gathered from student subjects. In a review of the extant regression-based results for herding in financial markets, Bikhchandani and Sharma (2000) note the difficulty of controlling for underlying fundamentals, and argue that as a 2 result of this difficulty there is often "a lack of a direct link between the theoretical discussion of herding behavior and the empirical specifications used to test for herding." 3The laboratory environment, in contrast, allows one to control for public and private information and thus to make explicit tests of theoretical predictions more easily. Yet an important debate exists about the relevance of experimental findings from student subjects for understanding phenomena in the field. For example, professional behavior in the field might differ from student behavior in laboratory experiments due to training or regulatory considerations, which may affect the development of decision heuristics, as well as the overall naturalness of the experimental environment (see, for example, Harrison and List (2004)). Locke and Mann (2005) argue that financial market research that ignores ...

Psychological insights have made inroads within most major areas of study in economics. One area where less advance has been made is environmental and resource economics. In this study, we examine the implications of preference reversals over evaluation modes, in which stated economic values critically depend on whether the good is valued jointly with others or in isolation. The question arises because two commonly used methods for eliciting stated preferences differ in that one presents objects together and another presents objects to be evaluated in isolation. Beyond showing an example of the import of behavioral economics, our empirical evidence sheds new light on the factors associated with insensitivity of valuations to the scope of the good.

Abstract:In settings characterized by imperfect information about an underlying state of nature, but where inferences are made sequentially and are publicly observable, decisions may yield a "cascade" in which everyone herds on a single choice. While cascades potentially play a role in a variety of settings, from technology adoption to social processes such as mate selection, understanding cascade phenomena is imperative for financial markets. Previous empirical efforts studying cascade formation have used both naturally occurring data and laboratory experiments. In this paper, we combine two of the attractive elements of each line of research-observation of Chicago Board of Trade market professionals in a controlled environment-to push the investigation of cascade behavior into several new directions. Numerous empirical insights are obtained; perhaps most importantly we find that market professionals behave quite differently than a control group of college student subjects. In particular, the market professionals base their decisions on the "quality" of the public signal to a greater extent than do students, leading professionals to be more likely to disregard "bad" signals. And, unlike in the case with students, for market professionals, the propensity to be Bayesian does not differ significantly across the gain and loss domains.