Can Herding Improve Investment Decisions?

48 Pages Posted: 24 Dec 2008 Last revised: 14 Mar 2010

See all articles by Naveen Khanna

Naveen Khanna

Michigan State University

Richmond D. Mathews

University of Maryland - Department of Finance

Date Written: March 10, 2010

Abstract

Existing models show that herding in decisions can cause signi cant information loss, inferior information aggregation and impaired decision making. However, we show that in a multi-stage decision setting with endogenous information production, herding on the initial decision can actually result in superior aggregate information and improved decisions. This is because the possibility of herding by a follower incentivizes the leader to increase its ex-ante information production to an extent that it can dominate the information loss from herding. Examples include decisions to enter new markets, fund R&D, and provide early-stage venture capital.

Keywords: herding, entry, information, cascades, innovation, venture capital

JEL Classification: D80, G20, G30

Suggested Citation

Khanna, Naveen and Mathews, Richmond D., Can Herding Improve Investment Decisions? (March 10, 2010). Available at SSRN: https://ssrn.com/abstract=1318392 or http://dx.doi.org/10.2139/ssrn.1318392

Naveen Khanna

Michigan State University ( email )

East Lansing, MI 48824-1121
United States
517-353-1853 (Phone)
517-432-1080 (Fax)

Richmond D. Mathews (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

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