Abstract

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 the highest wealth increases as ranked on 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 price bubbles and the awareness of information asymmetry leads to fewer bubbles as risk-averse traders become more cautious and do not quote prices too far from the fundamental value. We also find that participants with financial training have a lower herding tendency and markets with these participants exhibit less mispricing.