Herding with Leading Traders : Evidence from a Laboratory Social Trading Platform

We provide novel evidence about herd behavior and its impact on asset price bubbles in an experimental financial market. We find that traders imitate quotes of those with highest wealth increases as ranked in the leader-boards, despite that no traders possess private value-related information and that wealth increases are not due to trading skills. Most remarkably, we find that herd behavior does not produce more asset price bubbles and information asymmetry arising when the leader-boards become costly leads to fewer bubbles as risk-averse traders become more cautious and not quoting prices too far from the fundamental value. We also find that participants with financial training have lower herding tendency and markets with these participants exhibit less mispricing