Herding, contrarianism and delay in financial market trading

Abstract

Herding and contrarian behaviour are often-cited features of real-world financial markets. Theoretical models of continuous trading that study herding and contrarianism, however, usually do not allow traders to choose when to trade or to trade more than once. We present a large-scale experiment to explore these features within a tightly controlled laboratory environment.Herding and contrarianism are more pronounced than in comparable studies that do not allow traders to time their decisions. Traders with extreme information tend to trade earliest, followed by those with information conducive to contrarianism, while those with the theoretical potential to herd delay the most. A sizeable fraction of trades is clustered in time.JEL Classification: C91, D82, G14.

Behavioral finance: insights from experiments I: theory and financial markets

“…Alternatively, given the finding that individuals have a tendency to act as contrarians, another possibility is that herding disappears when the artificial friction of exogenous timing is removed. Park and Sgroi (2012) find that both herding and contrarianism are observed to a greater extent than is found in comparable studies by Drehmann et al (2005) or Cipriani and Guarino (2005) that do not allow traders to time their decisions. Park and Sgroi (2012) note that endogenous-timing of trades does not change the predictions derived from sequential models of herd behavior, hence their results suggest that findings in earlier experiments where the sequence of trading is determined exogenously are likely still valid.…”

“…Park and Sgroi (2012) find that both herding and contrarianism are observed to a greater extent than is found in comparable studies by Drehmann et al (2005) or Cipriani and Guarino (2005) that do not allow traders to time their decisions. Park and Sgroi (2012) note that endogenous-timing of trades does not change the predictions derived from sequential models of herd behavior, hence their results suggest that findings in earlier experiments where the sequence of trading is determined exogenously are likely still valid. Herding could be taken to imply not only that people take the same action, but that they do so at (almost) the same time, though this is not present in definitions or models of herding.…”

“…Theoretical models and experimental studies of herding tend not to allow traders to choose when to trade nor do they allow them to enter into multiple trades. In an innovative experimental design, Park and Sgroi (2012) explore the effect of introducing more realistic features in a market where participants can trade one or two units and where the timing of trades is determined endogenously rather than exogenously imposed sequential trading. Herding-prone traders might delay their actions, thus enhancing herd behavior relative to exogenous timing settings.…”

Behavioral biases in endogenous-timing herding games: An experimental study

“…4 Another strand of the literature, pioneered by Avery and Zemsky (1998), retains the exogenoustiming assumption but allows the investment cost (or asset price) to change as new information is revealed. See Cipriani, Guarino (2005) and Drehmann et al (2005), and Park and Sgroi (2012) for experimental studies.…”

Informational Price Cascades and Non-Aggregation of Asymmetric Information in Experimental Asset Markets

“…The only effort we are aware of that incorporate flexible competitive prices with endogenous timing is the experimental study by Park and Sgroi (2009) in which subjects are provided signals of heterogeneous strength prior to trading. Their focus however is on the effects of differentially precise signals and its impact on the actions of insiders.…”