Information Cascades: Evidence from An Experiment with Financial Market Professionals
Previous empirical studies of information cascades use either naturally occurring data or laboratory experiments with student subjects. We combine attractive elements from each of these lines of research by observing market professionals from the Chicago Board of Trade (CBOT) in a controlled environment. As a baseline, we compare their behavior to student choices in similar treatments. We further examine whether, and to what extent, cascade formation is influenced by both private signal strength and the quality of previous public signals, as well as decision heuristics that differ from Bayesian rationality. Analysis of over 1,500 individual decisions suggests that CBOT professionals are better able to discern the quality of public signals than their student counterparts. This leads to much different cascade formation. Further, while the behavior of students is consistent with the notion that losses loom larger than gains, market professionals are unaffected by the domain of earnings. These results are important in both a positive and normative sense.
Alevy is from the Department of Resource Economics at the University of Nevada - Reno, Haigh is from the U.S. Commodity Futures Trading Commission and List is from the Department of Economics at the University of Chicago and NBER. John Di Clemente, former managing director of research at the Chicago Board of Trade, authorized this study. Also special thanks to CBOT staff Dorothy Ackerman Anderson, Frederick Sturm, and Keith Schap for their incredible support on site. Valuable comments and suggestions were provided by seminar participants at Harvard University, University of Chicago, University of Maryland, George Mason University, American University, University of Nevada at Reno, University of Texas at Dallas, the NCR-134 Conference on Applied Commodity Price Analysis, Forecasting and Market Risk Management (St. Louis, Missouri, April 2003), the Economic Science Association International Conference, (Pittsburgh, Pennsylvania, July 2003), the Financial Management Association Annual Meeting (New Orleans, October, 2004) and the University of Copenhagen Workshop on Herding (Copenhagen, September, 2005). Nathan Berg, Liesl Koch, Michael Price, Vernon Smith, Georg Weizsacker, and Anthony Ziegelmeyer provided useful comments on the manuscript. The views expressed in this paper are those of the authors and do not in any way reflect the views or opinions of the U.S. CFTC. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Jonathan E. Alevy & Michael S. Haigh & John A. List, 2007. "Information Cascades: Evidence from a Field Experiment with Financial Market Professionals," Journal of Finance, American Finance Association, vol. 62(1), pages 151-180, 02.