Herding, Information Uncertainty and Investors' Cognitive Profile

Qualitative Research in Financial Markets, Vol. 3, No. 1, pp. 7-33, 2011

Posted: 13 May 2011

See all articles by Eleuterio Vallelado

Eleuterio Vallelado

University of Valladolid; University of Valladolid

Beatriz Fernández-Alonso

University of Valladolid - Department of Finance and Accounting

Teresa García Merino

University of Valladolid

Rosa M. Mayoral

University of Valladolid

Valle Santos Alvarez

University of Valladolid - Department of Economics and Business Administration

Date Written: May 6, 2011

Abstract

Purpose – The 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/approach – The authors designed and conducted an experiment to observe the behavior of subjects in three settings, each with a different level of information.

Findings – Results 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/implications – Future 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 implications – The herding phenomenon is difficult to anticipate because there are factors of a very diverse nature that intervene.

Originality/value – The research described in this paper measures investors' cognitive profile to identify the interaction between availability of information, cognitive profile and herding.

Keywords: Financial information, Individual behaviour, Investors, Uncertainty management

JEL Classification: G14, C91, D8

Suggested Citation

Vallelado, Eleuterio and Fernández-Alonso, Beatriz and García Merino, Teresa and Mayoral, Rosa M. and Santos Alvarez, Valle, Herding, Information Uncertainty and Investors' Cognitive Profile (May 6, 2011). Qualitative Research in Financial Markets, Vol. 3, No. 1, pp. 7-33, 2011, Available at SSRN: https://ssrn.com/abstract=1833213

Eleuterio Vallelado (Contact Author)

University of Valladolid ( email )

Avda. Valle Esgueva 6
47011 Valladolid, 47011
Spain
983423387 (Phone)
983186484 (Fax)

HOME PAGE: http://eleuteriovallelado.blogs.uva.es/

University of Valladolid ( email )

8 C/Plaza de Santa Cruz
Valladolid, Valladolid 47002
Spain
+34983423387 (Phone)

HOME PAGE: http://eleuteriovallelado.blogs.uva.es/

Beatriz Fernández-Alonso

University of Valladolid - Department of Finance and Accounting ( email )

Pº Prado de la Magdalena s/n
47005 Valladolid, Valladolid
Spain
34983423605 (Phone)
34983423056 (Fax)

Teresa García Merino

University of Valladolid ( email )

Avda. Valle Esgueva 6
47011 Valladolid
Spain
983 423387 (Phone)

Rosa M. Mayoral

University of Valladolid ( email )

Avda. Valle Esgueva 6
Valladolid, 47011
Spain
+34 983 42 33 34 (Phone)
+34 983 18 64 84 (Fax)

Valle Santos Alvarez

University of Valladolid - Department of Economics and Business Administration ( email )

Avda. Valle Esgueva 6
47011 Valladolid
Spain

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