Information cascades: Evidence from a field experiment with financial market professionals

By Jonathan Alevy, Michael S. Haigh, John A. List. 2005

234 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Management Science and Operations Research, Safety Research

View Paper: https://www.semanticscholar.org/paper/2563cbef4e18988d2b59aa9ab0e32404fea367d2

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Citations in the corpus

Rankings and Risk-Taking in the Finance Industry (2018, unknown): “Similar to other studies (List and Haigh, 2005; Alevy et al., 2007; Cohn et al., 2014), we scaled down student stakes to 1/3 of the professionals’ payoffs in all parts of the experiment.”
How do people update? The effects of local weather fluctuations on beliefs about global warming (2012, methodology): “Some studies find that there is substantial heterogeneity among subjects and treatments in the use of Bayes’s rule (Alevy et al. 2007; Wiswall and Zafar 2011; Holt and Smith 2009).”
On the Linkage between Financial Risk Tolerance and Risk Aversion: Evidence from a Psychometrically-Validated Survey versus an Online Lottery Choice Experiment (2006, unknown): “For example, Haigh and List (2005) and Alevy et al. (2007) focus on professional CBOT traders, while Harrison et al.”
Climate Change and Adaptation in Global Supply-Chain Networks (2019, background): “A large literature in finance and economics has proposed Bayesian updating to model how economic agents infer information about changing climate distributions from their own experience (Alevy et al., 2007; Chiang et al., 2011; Deryugina, 2013; Moore, 2017; Kala, 2019; Choi et al., 2020; Kelly et al.”
Thought and Behavior Contagion in Capital Markets (2008, unknown): “Furthermore, if asset values are imperfectly correlated, cascades can pass contagiously between banks and cause mistaken runs even in banks that could have remained sound; (on information and contagious bank runs, see Gorton (1988), Chen (1999), and Allen and Gale (2000b)).”
Crises and Collective Socio-Economic Phenomena: Simple Models and Challenges (2012, background): “18See also [92, 93] for experiments on information cascades and [94] for some empirical evidence of tipping points in urban segregation phenomena.”
Field experiments in labor economics (2010, methodology): “…market theory in the field (List 2002b, 2004c, List and Price 2005), and tests of information assimilation among professional financial traders (Alevy et al. 2007).21 Unlike social experiments, this type of framed field experiment does not need to worry about many of the shortcomings discussed…”
Viewpoint: On the Generalizability of Lab Behaviour to the Field (2007, unknown): “One prominent example is Bayesian decision making, where there is evidence consistent with the hypothesis that experience does not considerably induce individuals to become 'better Bayesians' (see, e.g., Camerer, 1987, 1992; Alevy, Haigh, and List 2006).”
Subject pool effects in a corruption experiment: A comparison of Indonesian public servants and Indonesian students (2009, background): “2”