Information Cascades: Evidence from a Field Experiment with Financial Market Professionals

Abstract

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.

The good, the bad, and the talented: Entrepreneurial talent and selfish behavior

“…At first thought it might seem prudent to use actual entrepreneurs as participants. However, despite the potential benefits of focusing on selected professionals for experiments (Alevy et al, 2007;Drehmann et al, 2005;Elston et al, 2006;Elston and Audretsch, forthcoming), there are at least three reasons why established entrepreneurs (e.g., business owners) are not a suitable population for our experiment. First, established entrepreneurs have already revealed their occupational choice and would therefore bias our sample on one of the possible outcomes of entrepreneurial talent.…”

Overconfidence Among Professional Investors: Evidence from Mutual Fund Managers

“…Kaustia et al (2008) show experimentally that financial market professionals are prone to the anchoring effect, but not as strongly as a sample of university students. Comparing the behavior of students and professional traders from the CBOT in an experimental setting, Haigh and List (2010) find that professional traders show a greater extent of myopic loss aversion than students, while Alevy et al (2007) in another experiment find that professionals are less loss averse. Coval and Shumway (2005) also provide evidence that CBOT traders are loss averse.…”

Impact Of Cognitive Profile And Information Uncertainty On Herding Behavior Of Investor

“…• It can be explained that the market professionals show less biasness than the finance students (Alevy, 2007) • Herd is formed equally by the marker professionals and the finance students.…”

“…These experiments are beneficial as the public and private information can be controlled and this will make enable to test the herd behavior more easily. (Alevy, 2007) These experiments and field research enable to study the important factors relative to the herding behavior of investors. Experimental study is the most pertinent method to examine the herding behavior by separating the cause and effect of behavior and individually examining the behavior and its cause.…”