Working Paper: NBER ID: w12767
Authors: Jonathan E. Alevy; Michael S. Haigh; John List
Abstract: 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.
Keywords: information cascades; financial markets; decision heuristics; bayesian rationality
JEL Codes: G11; G14; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Professional experience (A29) | Ability to discern quality of public signals (L15) |
| Ability to discern quality of public signals (L15) | Patterns of cascade formation (C69) |
| Professional experience (A29) | Fewer overall cascades (C69) |
| Professional experience (A29) | Fewer reverse cascades (C69) |
| Loss aversion (G41) | Decision-making of students (D91) |
| Professional experience (A29) | Unaffected by domain of earnings (G19) |
| Professional experience (A29) | Bayesian behavior (C11) |
| Bayesian behavior (C11) | Adherence to Bayesian decision-making principles (D91) |