Herding, information uncertainty and investors' cognitive profile

Abstract

PurposeThe purpose of this paper is to analyze the interaction between the availability of financial information and individuals' cognitive profiles to explain investors' herding behavior.Design/methodology/approachThe authors designed and conducted an experiment to observe the behavior of subjects in three settings, each with a different level of information.FindingsResults confirm that a dependence relation exists between information, investors' behavioral biases and the herding phenomenon. Moreover, the experiment shows that information concerning the number of previous transactions in the market is particularly relevant to explain herding propensity among investors. The findings indicate that the cognitive profile of investors is more relevant as the availability of information increases and the number of previous transactions in the market is low.Research limitations/implicationsFuture research should examine further the best way to measure the individual's cognitive profile and its interaction with information limitation in financial markets. The presence of high levels of uncertainty favors herding behavior regardless of inter‐individual differences, and only when the availability of information is high and the number of transactions is low does the subjects' cognitive profile explain the investors' herding behavior. Finally, it is observed that not all public information receives the same attention by investors. The attractiveness of public information requires further attention.Social implicationsThe herding phenomenon is difficult to anticipate because there are factors of a very diverse nature that intervene.Originality/valueThe research described in this paper measures investors' cognitive profile to identify the interaction between availability of information, cognitive profile and herding.

Investor communication in equity-based crowdfunding: a qualitative-empirical study

“…Peer effects apply to any social process in which the behavior of a group influences the individual (Hirshleifer and Hong Teoh, 2003;Olsen, 2010;Ward and Ramachandran, 2010). Prior research shows that peer effects are more likely to occur if specific market conditions -such as uncertain environments, significant information asymmetries, the observability of others' behavior and fixed price settings -are met (Banerjee, 1992;Bikhchandani et al, 1992;Cipriani and Guarino, 2005;Devenow and Welch, 1996;Dholakia et al, 2002;Fernández et al, 2011). In crowdfunding, often all of these criteria apply, and peer effects appear to play a major role (Table V).…”

Herding Behaviour in Investment Decision Making: A Review

“…The experiment being conducted confirmed the relationship among the three phenomenons. The information concerning the number of previous transactions relevantly explains herding behaviour [53].…”

“…Firstly, quantitative measurement of herding is still elusive of perfection. Measures suggested by Lakonishok [49], Christie and Hwang [50], GTW [30] and Wermers [51] come with a number of limitations [14,53,15,11]. Although these techniques have seen improvement over a period of time but there is a definite scope on the side of mathematical frontier.…”

Mimetic Herding Behavior and the Decision to Strategically Default

“…Jegadeesh and Kim (2010) suggest less herding in this situation because individuals are implicitly given greater freedom to choose any score they want. Alternatively, Fernández et al (2011) interpret a wider dispersion in the distribution of participant responses as being reflective of a more uncertain market environment. If this is the case, the uncertainty would be a reason for participants to herd more, not less.…”