Chad Kendall (University of Southern California), « Herding and Contrarianism: A Matter of Preference », Paul Woolley Research Initiative Seminar, IDEI, 28 novembre 2016, 12h30–14h00, salle MF 323.


Herding and contrarianism in financial markets produce informational inefficiencies when investors ignore their private information, instead following or bucking recent trends. I theoretically establish a preference-based link between the two behaviors: investors with prospect theory preferences follow one of the two strategies generically, depending only upon the relative strengths of their utility curvature and non-linearity in decision weights. The third aspect of prospect theory, loss aversion, further exacerbates informational efficiencies, causing traders to not trade at intermediate beliefs. Through a laboratory experiment, I provide strong evidence in support of the model's theoretical predictions and find that herding is by far more common than contrarianism.

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Paul Woolley Research Initiative