An Experimental Study of Herding and Contrarian Behavior Among Financial Investors

Abstract

One of the arguments to explain the existence of anomalies in capital markets is the existence of cognitive biases in the behaviour of investors. Our goal is to study one of these cognitive biases: herding among investors. Our laboratory experiment results lead us to reject that subjects' tendency to herd is to blame for inadequate price formation in financial markets. In a setting where subjects receive a fixed payment, their reputation cannot be questioned and gathering private information does not prove costly, individuals do not display any tendency to herd. Moreover, we observe contrarian behaviour which leads subjects to take decisions against their own private information, ignoring public information they already have available.

Keywords: Herding, contrarian behavior, experiment

JEL Classification: G14, G19, C91