Article2008

Social influence on predictions of simulated stock prices

10 citations0/0 files storedJournal of Behavioral Decision Making

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Decision-Making and Behavioral Economics Financial Markets and Investment Strategies Experimental Behavioral Economics Studies

Abstract

Abstract Herding in financial markets refers to that investors are influenced by others. This study addresses the importance of consistency for herding. It is suggested that, in financial markets perceptions of consistency are based on repeated observations over time. Consistency may then be perceived as the agreement across time between investors' predictions. In addition, consistency may be related to variance over time in each investor's predictions. In an experiment using a Multiple Cue Probability Learning paradigm, 96 undergraduates made multi‐trial predictions of future stock prices given information about the current price and the predictions made by five fictitious others. Consistency was varied between the others' predictions (correlation) and within the others' predictions (variance). The results showed that the predictions were significantly influenced by the others' predictions when these were correlated. No effect of variance was observed. Hence, participants were influenced by the others when they were in agreement, regardless of whether they varied their predictions over trials or not. Copyright © 2008 John Wiley & Sons, Ltd.

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References

1954A Theory of Social Comparison Processes 1969The Handbook of Social Psychology 1955A study of normative and informational social influences upon individual judgment.1956Studies of independence and conformity: I. A minority of one against a unanimous majority.2000Mutual Fund Performance: An Empirical Decomposition into Stock‐Picking Talent, Style, Transactions Costs, and Expenses 2000Irrational Exuberance 1996Culture and conformity: A meta-analysis of studies using Asch's (1952b, 1956) line judgment task.1996Rational herding in financial economics

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