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THE HERD INSTINCT IS LESS IMPORTANT THAN EXPECTED IN SHARE-BUYING
They found no signs of 'herd instinct' during the experiment, on the contrary, some of the test subjects decided against buying those specific shares which had just been bought by so many other players. Psychologists, particularly, mistrusted those shares which they regarded as overvalued. This strategy benefited them enormously: on average they were markedly more successful in their speculation than physicists or mathematicians, or even economists. On average the psychologists earned three times as much as economists and physicists in the stock exchange game. 'They tended to decide against buying shares precisely when a lot of other players had bought them,' Dr. Andreas Roider of the University of Bonn's Economics Department explains. Many discussions up to now have assumed the opposite: investors, it was thought, behave like lemmings. They always buy those shares which are most in demand at a particular time, thereby pushing the share prices too high (or too low). Hardly any explanation of the turbulences on the financial markets are without some reference to the marked predisposition to the herd instinct which allegedly investors show. Yet it might also be the case that each investor has decided in favour of buying independently of the behaviour of other investors - for example, because information has become available about a particular share which argues in favour of buying. Whether shareholders really are influenced by the 'herd instinct' is therefore hard to determine in practice. An economic experiment under controlled conditions was meant to help clarify this issue. Together with corporate consultants McKinsey Professor Jörg Oechssler of the University of Heidelberg with his co-authors Dr. Andreas Roider and Dr. Matthias Drehmann of the Bank of England carried out a financial markets game via the Internet. In it just under 6,500 participants were able to deal in different stocks and shares. Prizes amounting to over 11,000 euros ensured that the game was taken seriously. 'The players were able to decide in favour of two fictitious shares A and B,' Dr. Roider explains. 'Only one share turned up a profit at the end of the game, the other being a dud.' Before making a decision to buy each participant was given a tip by their investment banker, e.g. 'Share A is a winner.' However, these tips were only true in two out of three cases - even investment bankers can make mistakes. As soon as a player had decided in favour of a specific share, the share rose in price. 'The players could now buy their shares consecutively,' Dr. Roider says. 'The first one was only able to rely on the investment banker's tip. The subsequent buyers, by contrast, were also able to see from the share index what shares their predecessors had chosen.
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