A Neural Basis of Herd Behavior in Stock Market: An Experimental Design

16 Pages Posted: 15 Feb 2011

See all articles by Hao Liang

Hao Liang

Singapore Management University - Lee Kong Chian School of Business; European Corporate Governance Institute (ECGI)

Date Written: February 15, 2011

Abstract

A widely observed phenomenon in the financial market is the irrational herd behavior of investors who tend to move together in stock trading under certain market conditions. While behavioral finance literature tries to explain investors’ sentiments and behaviors through psychological factors, neural finance studies explore the brain activity during their financial decision making. This preliminary study depicts an experimental design for investigating the neural basis of herd behavior in stock trading under both the normal market condition when investors trade strategically, and the extreme market condition when herd behavior exhibits. In particular, I predict that two brain regions, namely the anterior insula and the medial prefrontal cortex, would be significantly activated when the investor faces dramatic price fluctuation and smooth price change respectively. Several conditions are contrasted to make more detailed predictions about how these regions are correlated with certain trading behaviors. More inferences are subject to further experiment results and comparisons with other social behavioral studies.

Keywords: herd behavior, neuroeconomics, anterior insula, medial prefrontal cortex

Suggested Citation

Liang, Hao, A Neural Basis of Herd Behavior in Stock Market: An Experimental Design (February 15, 2011). Available at SSRN: https://ssrn.com/abstract=1761903 or http://dx.doi.org/10.2139/ssrn.1761903

Hao Liang (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

HOME PAGE: http://business.smu.edu.sg/faculty/profile/130396/LIANG-Hao

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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