Social influence on predictions of simulated stock prices

Abstract

Herding in financial markets refers to that investors are influenced by others. This study addresses the importance of consistency for herding. It is suggested that, in financial markets perceptions of consistency are based on repeated observations over time. Consistency may then be perceived as the agreement across time between investors' predictions. In addition, consistency may be related to variance over time in each investor's predictions. In an experiment using a Multiple Cue Probability Learning paradigm, 96 undergraduates made multi-trial predictions of future stock prices given information about the current price and the predictions made by five fictitious others. Consistency was varied between the others' predictions (correlation) and within the others' predictions (variance). The results showed that the predictions were significantly influenced by the others' predictions when these were correlated. No effect of variance was observed. Hence, participants were influenced by the others when they were in agreement, regardless of whether they varied their predictions over trials or not.

Crowd characteristics and crowd wisdom: Evidence from an online investment community

“…The importance of keeping independence is different for crowds with different crowd sizes because the degree of social influence is different for them (Latané, ). Crowd wisdom is the product of disagreement and conflict, not consensus (Surowiecki, ), as participants will be influenced by the others when they are in agreement (Andersson, Hedesström, & Gärling, ). According to social impact theory, the larger the group the greater its impact (Latané, ), so with the crowd size becoming too large, it is easy for crowd members to conform to the majority opinion.…”

Psychology, Financial Decision Making, and Financial Crises

“…Andersson (2009) and Andersson, Hedesström, and Gärling (2009) reported a series of experiments in which undergraduates were asked to make predictions of changes in fictitious stock prices that were both systematic and unsystematic. Consistent with the results of research on probabilistic inference (Cooksey, 1996), the influence on the predictions of the current stock price increased when stock prices systematically increased.…”

Review of behavioral explanations of how rank-based incentives influence risk taking by investment managers in mutual fund companies

“…This has been shown in experiments demonstrating the operation of a consensus heuristic (Martin et al, 2007). For instance, Andersson et al (2009) conduct a multi-period experiment in which Swedish undergraduates are asked to make predictions of stock prices that vary randomly. Before making each prediction participants are informed about the predictions allegedly made by five other participants before them.…”