Herding, contrarianism and delay in financial market trading : a lab experiment

Economic theory routinely assumes rational trading and efficient prices, but these two may contradict each-other: rational traders will seek to observe each-other and through Bayesian inference infer what they can from the actions of others. Early incorrect information can thereby infect the decisions of many. We test this theory experimentally, as it is only in a controlled laboratory that we know what information traders posses and how it is used. We find that some types of information can drive herding and contrarian behaviour, potentially creating a short-run wedge between market prices and fundamental values. We also find that traders have a tendency to behave simultaneously that complements informationbased theory