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A Social-Psychological Perspective on Herding in Stock Markets

Journal article
Authors Maria Andersson
Martin Hedesström
Tommy Gärling
Published in The Journal of Behavioral Finance
Volume 15
Issue 3
Pages 226-234
ISSN 1542-7560
Publication year 2014
Published at Department of Psychology
Centre for Finance
Pages 226-234
Language en
Keywords Herding, social influence, prediction, stock price
Subject categories Applied Psychology, Economics

Abstract

A social-psychological perspective conceives of herding in stock markets as informative social influence resulting from heuristic or systematic information processing. In three laboratory experiments employing undergraduates we apply this perspective to investigate factors that prevent herd influence that would lead to inaccurate predictions of stock prices. In Experiment 1 we show that an economic reward for making the same predictions as the herd increases the influence of a majority but not the influence of a minority, and that an individual economic reward for making accurate predictions reduces the influence of the majority. In Experiment 2 we show a reduced influence of a majority herd’s inaccurate predictions when requiring assessments of the accuracy of the majority herd´s predictions as compared to requiring judgments of their consistency. Experiment 3 shows that a lower volatility of stock prices reduces the influence of a majority herd´s inaccurate predictions

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