An experimental investigation of the “follow own signal” decision rule under increased information uncertainty

Abstract

PurposeThis study aims to examine individuals' tendency to strictly follow their own signal while ignoring predecessors' decisions when making decisions under varying degrees of uncertainty.Design/methodology/approachUsing a controlled laboratory experiment, the authors separate the follow-own-signal behavior from other types of behavior such as Bayes consistent or herd-like (i.e. follow-the-majority) behavior.FindingsAs the authors systemically increase the degree of uncertainty in the information environment, participants are increasingly more likely to act only on their own signal. This suggests that financial decisions that are made under highly uncertain market conditions may be more signal revealing, and hence, may lead to better information aggregation than previously thought. The authors also find that as uncertainty increases, participants are more likely to switch in and out of this behavior, suggesting that behavior under highly uncertain conditions may also be more random and complex.Originality/valueThe authors are the first to examine how uncertainty affects the follow-own-signal behavior. The authors also offer potential testable empirical implications, such as an increase in contrarian investing, home bias, and own-company ownership under times of increased uncertainty or in more uncertain markets.