Reputational Herding in Financial Markets: A Laboratory Experiment

Roider, Andreas; Voskort, Andrea

doi:10.2139/ssrn.2555575

Cited by 2 publications

(2 citation statements)

References 31 publications

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“…Most of the reviewed studies did not consider herding as an explicit strategy. Rather, herding is assumed to occur mainly implicitly in reaction to social influences and/or conflicting economically relevant information (Fernández et al, 2011;Roider & Voskort, 2016). However, herding may also be intended as an explicit economic strategy of both economic suppliers and consumers (for an overview, see Brunnermeier, 2001).…”

Section: Distinct Stages Of the Formation Of A Herdmentioning

confidence: 99%

Why do we herd in financial contexts?

Bobe

Piefke

2019

Journal of Neuroscience, Psychology, and Economics

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Herding behavior has been targeted by economists as a problem on financial markets, in particular, because herding behavior foils economic theories of rationality. Recently, neuroscientists and psychologists joined the debate: Herding phenomena are of particular interest with respect to current models of the interaction between emotion and cognition. The multidisciplinary theoretical understanding and the development of scientifically advised options of control of herding behavior on the financial market still remain to be a challenge. The present review aims at providing a systematic multidisciplinary state of the art of research on herding behavior in financial contexts, which may help to better theoretically understand and practically control herding phenomena. We reviewed empirical studies from economics, psychology, and the neurosciences to identify their conceptual and methodological similarities and differences. We calculated effect sizes for factors influencing herding. Results of our meta-analysis demonstrate for the first time three degrees of specificity and five recurrent features (imitation, private information, informational cascades, conformity, and reputation) of definitions of herding. Moreover, we identified 47 factors that may influence herding. These include implicit and explicit factors with either facilitating or inhibiting effects. Based on our results, we propose a definition and a conceptual taxonomy of herding in financial contexts, which may be used as a basis for multidisciplinary theories and practical approaches to the control of herding.

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Section: Distinct Stages Of the Formation Of A Herdmentioning

confidence: 99%

Why do we herd in financial contexts?

Bobe

Piefke

2019

Journal of Neuroscience, Psychology, and Economics

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“…Studying the herding effect is difficult, however. Although randomized experiments have been successfully deployed to quantify social influence in rating behavior [6,13], experiments can be risky from a business and ethical perspective, for either they wilfully subject products to random treatments with potentially harmful effects, or they are restricted to small laboratory settings [14], which reduces the generality of findings. Observational studies of herding [2,3,10], on the other hand, are less delicate in this regard than randomized experiments, but they are more delicate methodologically, as they require more care during the analysis.…”

Section: Introductionmentioning

confidence: 99%

When Sheep Shop

Lederrey

West

2018

Proceedings of the 2018 World Wide Web Conference on World Wide Web - WWW '18

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As online shopping becomes ever more prevalent, customers rely increasingly on product rating websites for making purchase decisions. The reliability of online ratings, however, is potentially compromised by the so-called herding effect: when rating a product, customers may be biased to follow other customers' previous ratings of the same product. This is problematic because it skews long-term customer perception through haphazard early ratings. The study of herding poses methodological challenges. In particular, observational studies are impeded by the lack of counterfactuals: simply correlating early with subsequent ratings is insufficient because we cannot know what the subsequent ratings would have looked like had the first ratings been different. The methodology introduced here exploits a setting that comes close to an experiment, although it is purely observational-a natural experiment. Our key methodological device consists in studying the same product on two separate rating sites, focusing on products that received a high first rating on one site, and a low first rating on the other. This largely controls for confounds such as a product's inherent quality, advertising, and producer identity, and lets us isolate the effect of the first rating on subsequent ratings. In a case study, we focus on beers as products and jointly study two beer rating sites, but our method applies to any pair of sites across which products can be matched. We find clear evidence of herding in beer ratings. For instance, if a beer receives a very high first rating, its second rating is on average half a standard deviation higher, compared to a situation where the identical beer receives a very low first rating. Moreover, herding effects tend to last a long time and are noticeable even after 20 or more ratings. Our results have important implications for the design of better rating systems.

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Reputational Herding in Financial Markets: A Laboratory Experiment

Cited by 2 publications

References 31 publications

Why do we herd in financial contexts?

Why do we herd in financial contexts?

When Sheep Shop

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