Handbook of Behavioral Finance
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Handbook of Behavioral Finance

Edited by Brian Bruce

The Handbook of Behavioral Finance is a comprehensive, topical and concise source of cutting-edge research on recent developments in behavioral finance.
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Chapter 6: Intentional Herding in Stock Markets: An Alternate Approach in an International Context

Natividad Blasco, Pilar Corredor and Sandra Ferreruela


6 Intentional herding in stock markets: an alternative approach in an international context Natividad Blasco, Pilar Corredor and Sandra Ferreruela INTRODUCTION One of the issues of greatest concern in the world of finance is trying to understand how investors make decisions. The classic theoretical explanations are based on conditions of investor rationality and the perfection of markets, and the use of information available in the market as a decisive tool. In recent years the branch of behavioural finance has emerged strongly in the field to try to expand this vision of investor behaviour. Factors associated with the psychological and sociological behaviour of individuals have been introduced as significant elements that go some way to explain investor decisions. Thaler (1991) and Shefrin (2000), among others, have incorporated an emotional component into the classic models considering both visions as compatible and complementary. A survey of the history and contributions in this field of finance in recent years can be found in Sewell (2007). Within this context arises the concept of herding, which provides an additional explanation of investor behaviour. Bikhchandani and Sharma (2000) define herding as a decision of agents to intentionally copy the behaviour of other investors. However, there are a number of points of terminology than can lead to misunderstandings. So-called spurious herding or unintentional herding, as defined by Bikhchandani and Sharma (2000), refers to similar actions being observed among investors who respond in a similar manner to a similar information set, which is to say that it is the...

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