Herding leads to wrong decisions in the stock market

September 21, 2009

One reason for extreme fluctuations in the stock market is herding.

"Provided that the herd constitutes a majority, have a tendency to follow it without reflecting over their decisions. It can have devastating consequences," says the researcher Maria Andersson in a new thesis at the University of Gothenburg, Sweden.

"It is therefore important to understand which psychological mechanisms induce people to behave in the same way as everyone else," says Maria Andersson, who has studied why herding occurs in her doctoral thesis in psychology.

The contains various kinds of information that can provide guidance as to the future yield of shares. An important question is which information and analyses investors use when they make investment decisions. "A common strategy is to observe what others do and follow the herd," says Maria Andersson.

Influenced by a herd

The thesis presents four experimental studies that illustrate herding in the stock market. Some 450 people took part in the investigations. The primary aim was to establish whether investors are influenced by a herd when they make investment decisions, and if that is the case whether it matters if the herd constitutes a majority or a minority. The size of the herd and the of its judgements varied in the different studies.

In brief, the results show that there is a strong tendency to put trust in the majority being right and to disregard minorities. This result applies irrespective of whether the majority has performed well or not. Minorities on the other hand have no influence even if their point of view is correct.

Is there any way to avoid being drawn along with the herd?

The studies demonstrate ways of breaking the influence of the majority by getting the participants in the trials to use more premeditated thinking.

"This can be achieved by raising the participants’ awareness of how reliable the information is," says Maria Andersson.

Better and clearer information would probably also increase the chance of investors disregarding the herd. Being aware that the available concerning the stock exchange is not always reliable and critically examining what the herd is doing is consequently a good starting point for successful share dealing.

Source: University of Gothenburg (news : web)


Rank 4 /5 (4 votes)
Related Stories
Relevant PhysicsForums posts
  • Can I forget a language?
    createdFeb 10, 2012
  • The Biggest Lie Ever
    createdFeb 09, 2012
  • What are the limits of learning?
    createdFeb 06, 2012
  • Isn't that grammatically wrong?
    createdFeb 06, 2012
  • What does it mean when traders are indifferent?
    createdFeb 04, 2012
  • Peak of Our Civilization
    createdFeb 04, 2012
  • More from Physics Forums - Social Sciences

More news stories

A frank discussion of the power law and linking correlation to causation

(PhysOrg.com) -- Michael Stumpf a mathematics professor at Imperial College in London, and Mason Porter a lecturer at Oxford have teamed together to write and publish a perspective piece in Science regarding the in ...

Other Sciences / Mathematics

created Feb 10, 2012 | popularity 5 / 5 (5) | comments 10 | with audio podcast report

Employers feel no love for unscrupulous practice of 'service sweethearting'

A new study led by two Florida State University marketing professors finds that some frontline service employees who are rewarded for hikes in customer loyalty and satisfaction also may engage in "service ...

Other Sciences / Economics & Business

created Feb 10, 2012 | popularity 3.3 / 5 (3) | comments 11

US workers are 'giving away the store,' costing firms billions

Nearly 70 percent of the nation's service employees give away free goods and services – from hamburgers to cable TV – costing companies billions of dollars a year, according to a groundbreaking study.

Other Sciences / Economics & Business

created Feb 09, 2012 | popularity 3.5 / 5 (4) | comments 10

New insights into how to correct false knowledge

The abundance of false information available on the Internet, in movies and on TV has created a big challenge for educators.

Other Sciences / Social Sciences

created Feb 07, 2012 | popularity 4.9 / 5 (7) | comments 9 | with audio podcast

Neanderthal demise due to many influences, including cultural changes: study

As an ice age crept upon them thousands of years ago, Neanderthals and modern human ancestors expanded their territory ranges across Asia and Europe to adapt to the changing environment.

Other Sciences / Archaeology & Fossils

created Feb 07, 2012 | popularity 4.4 / 5 (5) | comments 8 | with audio podcast


Walney offshore wind farm is world's biggest (for now)

(PhysOrg.com) -- The Walney wind farm on the Irish Sea--characterized by high tides, waves and windy weather--officially opened this week. The farm is treated in the press as a very big deal as the Walney ...

GPS court ruling leaves US phone tracking unclear

A US Supreme Court decision requiring a warrant to place a GPS device on the car of a criminal suspect leaves unresolved the bigger issue of police tracking using mobile phones, legal experts say.

Europeans protest controversial Internet pact

Tens of thousands of people marched in protests in more than a dozen European cities Saturday against a controversial anti-online piracy pact that critics say could curtail Internet freedom.

Europe stakes billion-dollar bet on new rocket

A pencil-slim rocket is scheduled to lift into space from South America on Monday, carrying a billion-dollar bet that Europe can grab a juicy slice of the market to place satellites in low orbit.

Study finds that anti-diabetic medication can prevent the long-term effects of maternal obesity

In a study to be presented today at the Society for Maternal-Fetal Medicine's annual meeting, The Pregnancy Meeting, in Dallas, Texas, researchers will report findings that show that short therapy with the anti-diabetic medication ...

Netflix settlement trims 14 pct off 4Q earnings

(AP) -- Netflix pressed the rewind button on its fourth-quarter earnings after settling allegations that the video subscription service violated a consumer-privacy law.