An Experimental Study of Herding and Contrarian Behavior Among Financial Investors

35 Pages Posted: 27 Sep 2006

See all articles by Valentin Azofra-Palenzuela

Valentin Azofra-Palenzuela

University of Valladolid - Department of Finance and Accounting

Beatriz Fernández-Alonso

University of Valladolid - Department of Finance and Accounting

Eleuterio Vallelado

University of Valladolid; University of Valladolid

Date Written: September 2006

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

Suggested Citation

Azofra-Palenzuela, Valentin and Fernández-Alonso, Beatriz and Vallelado, Eleuterio, An Experimental Study of Herding and Contrarian Behavior Among Financial Investors (September 2006). Available at SSRN: https://ssrn.com/abstract=932928 or http://dx.doi.org/10.2139/ssrn.932928

Valentin Azofra-Palenzuela

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

Avda. Valle Esgueva 6
47011 Valladolid
Spain

Beatriz Fernández-Alonso (Contact Author)

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

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

Eleuterio Vallelado

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/

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