Introduction. The common misconception is that investors in stock markets, referred to as homo economicus at the beginning of the paper, are isolating individuals who do not gather in herds, and are thus not influenced by the herd. However, homo sapiens do gather in herds and are influenced by other humans, whether it is sometimes beneficial and other times when it is not. The research question here becomes, what is “the extent to which and how different types of social influence play roles in the investment process.” (p. 4). While influence may be direct, where herding occurs, it may also be indirect, “common knowledge, fads, common investment strategies, and similar compensation schemes.” (p. 5)
Review of Research. Much of the research centers around whether herding exists, whether it is rational or irrational, and what causes it. The literature has provided mixed results. While some studies indicate that herding exists, other studies indicate that it does not exist. (p. 5) Experimental studies research indicate that information that is provided by one’s actions is utilized by others. Additional literature indicates that information cascades where investors ignore their private information and imitate others in the herd. Experiments are cited where the above information cascades end in expected results and other experiments result in an unpredicted “irrational” result. So the studies do not indicate one way or another whether there is any validity in the rationality or irrationality of the social influence of herding. (p. 6)
Conclusions. The authors argue that social factors play a significant role in fluctuating boom-bust cycles. The direct and indirect social influences may reinforce the already existing cognitive biases “exaggerated by affective influences.” (p. 8). The research indicates that social influence occurs in herding but does point to a definitive reason for the herding. Some of the research indicates completely arbitrary results except in very narrow cases and others indicate completely different results.
However, additional research is needed to distinguish the difference between rational and irrational on the economic scale that is judged by the success of the speculation and the degrees of these terms in psychology where no distinction between each term exists. Reviewing all of the literature, the authors indicate that in order to definitively determine the rational and irrational influence, interdisciplinary studies need to be conducted.
Biel, A., Andersson, M., Hedesström, M. Jansson, M., Sundblad, E., Gärling, T.. (2010). Social Influence in Stockmarkets: A Conceptual Analysis of Social Influence Processes in Stock Markets. Sustainable Investment and Corporate Governance Working Papers, Sustainable Investment Research Platform, Department of Psychology University of Gothenburg Gothenburg Sweden.