To read the full version of this content please select one of the options below:

The effect of exogenous information signal strength on herding

Kimberly F. Luchtenberg (Department of Finance, Old Dominion University, Norfolk, Virginia, USA)
Michael Joseph Seiler (Mason School of Business, The College of William and Mary, Williamsburg, Virginia, USA)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 25 November 2013

Downloads
552

Abstract

Purpose

In the controlled environment of a professional business seminar, the paper collects data on the willingness of participants to strategically default on a mortgage that is underwater by varying degrees. By providing the participants with fabricated exogenous strong and weak information signals, the paper is able to examine the effect of the signals on their responses. The purpose of this paper is to find evidence suggesting that gender, moral opposition, level of susceptibility to information, and information signal strength influence herding in business professionals.

Design/methodology/approach

The paper adopts the Hirshleifer and Hong Teoh (2003) definition of herding as “any behavior similarity/dissimilarity brought about by the interaction of individuals.” In the controlled environment of a professional business seminar, the paper collects data on the willingness of participants to strategically default on a mortgage that is underwater by varying degrees. By providing the participants with fabricated exogenous strong and weak information signals, the paper is able to examine the effect of the signals on their responses.

Findings

The major contribution is that the paper finds evidence suggesting that signal strength does indeed matter. The paper finds that a weak signal is more likely to produce herding when respondents answer questions relating their own decisions and strong signals produce more herding when respondents provide advice to others. The paper also finds that women are less likely to herd and people who report they are susceptible to information influences are more likely to herd. Not surprisingly, participants who are morally opposed to strategic default are less likely to herd in most scenarios.

Originality/value

No other study of which the authors are aware looks specifically at signal strength in a financial setting or uses a sample of business professionals to examine herding of a financial nature.

Keywords

Acknowledgements

JEL classifications – G11, C93, D80, R20. The authors acknowledge funding support for their study from the Institute of Behavioral and Experimental Real Estate (IBERE.org).

Citation

F. Luchtenberg, K. and Joseph Seiler, M. (2013), "The effect of exogenous information signal strength on herding", Review of Behavioral Finance, Vol. 5 No. 2, pp. 153-174. https://doi.org/10.1108/RBF-05-2012-0004

Publisher

:

Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited