American Economic Review: Vol. 95 No. 5 (December 2005)
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Herd Behavior in a Laboratory Financial Market
Cipriani, Marco, and Antonio Guarino. 2005. "Herd Behavior in a Laboratory Financial Market." American Economic Review, 95(5): 1427-1443.
We study herd behavior in a laboratory financial market. Subjects receive private information on the fundamental value of an asset and trade it in sequence with a market maker. The market maker updates the asset price according to the history of trades. Theory predicts that agents should never herd. Our experimental results are in line with this prediction. Nevertheless, we observe a phenomenon not accounted for by the theory. In some cases, subjects decide not to use their private information and choose not to trade. In other cases, they ignore their private information to trade against the market (contrarian behavior).
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