Information Cascades: Evidence from a Field Experiment with Financial Market Professionals

In settings characterized by imperfect information about an underlying state of nature, but where inferences are made sequentially and are publicly observable, decisions may yield a cascade in which everyone herds on a single choice. While cascades potentially play a role in a variety of settings, from technology adoption to social processes such as mate selection, understanding cascade phenomena is imperative for financial markets. Previous empirical efforts studying cascade formation have used both naturally occurring data and laboratory experiments. In this paper, we combine one of the attractive elements of each line of research - observation of market professionals in a controlled environment - to push the investigation of cascade behavior into several new directions. Numerous empirical insights are obtained; perhaps most importantly, we find that market professionals behave quite differently than a control group of student subjects. In particular, market professionals, more so than students, base their decisions on the quality of the public signal, leading them to be more likely to disregard bad signals. And, unlike in the case with students, for market professionals, the propensity to be Bayesian does not differ significantly across the gain and loss domains. These results have important implications in both a positive and normative sense.