Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Herding leads to wrong decisions in the stock market

09.09.2009
One reason for extreme fluctuations in the stock market is herding.

- Provided that the herd constitutes a majority, investors 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.

- 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 stock market 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 reliability 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 information 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.

Title of the thesis: Social influence in stock markets.
E-link: http://hdl.handle.net/2077/20506
Faculty opponent's name: Professor Nigel Harvey, University College London, London, UK
Time and venue for the public defence:
Friday 11 September 2009 at 10.00, Lecture theatre F1, Haraldsgatan 1, Gothenburg
Author of the thesis: Maria Andersson, tel +46 (0)317861653 (work), +46 (0)702743331 (mobile)

e-mail:.maria.andersson@psy.gu.se

Lena Olson | idw
Further information:
http://hdl.handle.net/2077/20506
http://www.gu.se

Further reports about: Minorities investment decisions stock market wrong decisions

More articles from Business and Finance:

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Making lightweight construction suitable for series production

More and more automobile companies are focusing on body parts made of carbon fiber reinforced plastics (CFRP). However, manufacturing and repair costs must be further reduced in order to make CFRP more economical in use. Together with the Volkswagen AG and five other partners in the project HolQueSt 3D, the Laser Zentrum Hannover e.V. (LZH) has developed laser processes for the automatic trimming, drilling and repair of three-dimensional components.

Automated manufacturing processes are the basis for ultimately establishing the series production of CFRP components. In the project HolQueSt 3D, the LZH has...

Im Focus: Wonder material? Novel nanotube structure strengthens thin films for flexible electronics

Reflecting the structure of composites found in nature and the ancient world, researchers at the University of Illinois at Urbana-Champaign have synthesized thin carbon nanotube (CNT) textiles that exhibit both high electrical conductivity and a level of toughness that is about fifty times higher than copper films, currently used in electronics.

"The structural robustness of thin metal films has significant importance for the reliable operation of smart skin and flexible electronics including...

Im Focus: Deep inside Galaxy M87

The nearby, giant radio galaxy M87 hosts a supermassive black hole (BH) and is well-known for its bright jet dominating the spectrum over ten orders of magnitude in frequency. Due to its proximity, jet prominence, and the large black hole mass, M87 is the best laboratory for investigating the formation, acceleration, and collimation of relativistic jets. A research team led by Silke Britzen from the Max Planck Institute for Radio Astronomy in Bonn, Germany, has found strong indication for turbulent processes connecting the accretion disk and the jet of that galaxy providing insights into the longstanding problem of the origin of astrophysical jets.

Supermassive black holes form some of the most enigmatic phenomena in astrophysics. Their enormous energy output is supposed to be generated by the...

Im Focus: A Quantum Low Pass for Photons

Physicists in Garching observe novel quantum effect that limits the number of emitted photons.

The probability to find a certain number of photons inside a laser pulse usually corresponds to a classical distribution of independent events, the so-called...

Im Focus: Microprocessors based on a layer of just three atoms

Microprocessors based on atomically thin materials hold the promise of the evolution of traditional processors as well as new applications in the field of flexible electronics. Now, a TU Wien research team led by Thomas Müller has made a breakthrough in this field as part of an ongoing research project.

Two-dimensional materials, or 2D materials for short, are extremely versatile, although – or often more precisely because – they are made up of just one or a...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Expert meeting “Health Business Connect” will connect international medical technology companies

20.04.2017 | Event News

Wenn der Computer das Gehirn austrickst

18.04.2017 | Event News

7th International Conference on Crystalline Silicon Photovoltaics in Freiburg on April 3-5, 2017

03.04.2017 | Event News

 
Latest News

DGIST develops 20 times faster biosensor

24.04.2017 | Physics and Astronomy

Nanoimprinted hyperlens array: Paving the way for practical super-resolution imaging

24.04.2017 | Materials Sciences

Atomic-level motion may drive bacteria's ability to evade immune system defenses

24.04.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>