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Experimental Studies of Majority Influences in Financial Markets.

Conference paper
Authors Maria Andersson
Martin Hedesström
Tommy Gärling
Published in Paper presented at the 6th Nordic conference on group and social psychology (GRASP), Lund University, Sweden
Publication year 2008
Published at Department of Psychology
Language en
Keywords Herding, financial markets, accuracy, social influence processes
Subject categories Psychology

Abstract

Herding in financial markets refers to that investors imitate others when making investment decisions. The aim of this research is to investigate factors that would break influences of a majority of others. In one experiment we investigate the impact of the size of a herd (majority vs. minority), accuracy of the herds’ predictions, and attentional focus. Undergraduates serving as participants are asked to predict fictitious stock prices in 50 trials, conditional on information about the current price and predictions made by five fictitious other participants. The prices and the others’ predictions are generated by random sampling. A majority of the others’ predictions is correlated (rs  .95), and the predictions made by the majority are either random (uncorrelated with the price, r <.20) or accurate (correlated with the price, range of rs equal to .65 - .85). Participants are instructed to focus their attention on either accuracy or consistency of the others’ predictions. The results showed that a focus on accuracy reduced majority influence, whereas a focus on consistency had no effect. This was true both in the conditions with accurate and inaccurate majorities. An ongoing additional experiment investigates whether an accurate minority has an influence when its predictions have higher predictive validity than the price. The level of accuracy in the predictions made by the minority is either random (uncorrelated with the price, r <.20) or accurate (correlated with the price, rs  .95).

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