Rational Herding in Financial Economics

IFA 218-1995

Posted: 9 Jul 1998

See all articles by Andrea Devenow

Andrea Devenow

Movielink

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: September 1995

Abstract

This paper briefly describes recent papers on economics of rational herding in financial markets. Some models can predict perfect herding, in which rational agents all act alike without any counterveiling force. Such herding typically arises either from direct payoff externalities (negative externalities in bank runs; positive externalities in the generation of trading liquidity or in information acquisition), principal-agent problems (based on managerial desire to protect or signal reputation), or informational learning (cascades). The paper also provides a few pointers to related literature and suggests issues to be addressed in future research.

JEL Classification: G00, D7

Suggested Citation

Devenow, Andrea and Welch, Ivo, Rational Herding in Financial Economics (September 1995 ). IFA 218-1995. Available at SSRN: https://ssrn.com/abstract=7128

Andrea Devenow

Movielink

United States

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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