Article2011

Herding, information uncertainty and investors' cognitive profile

Beatriz Fernández · Teresa García Merino · Rosa M. Mayoral · Valle Santos · Eleuterio Vallelado González

60 citations0/0 files storedQualitative Research in Financial Markets

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

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.

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References

1974Judgment under Uncertainty: Heuristics and Biases 1975Judgment under Uncertainty: Heuristics and Biases 1936The General Theory of Employment, Interest and Money.1985Does the Stock Market Overreact?1992A Simple Model of Herd Behavior 1936The General Theory of Employment, Interest and Money, by John Maynard Keynes 1998Investor Psychology and Security Market Under‐ and Overreactions 2013Choices, Values, and Frames

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