Herding and Contrarian Behavior in Financial Markets


  • Andreas Park,

    1. Dept. of Economics, University of Toronto, Toronto, Ontario M5S 3G7, Canada; andreas.park@utoronto.ca
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  • Hamid Sabourian

    1. Faculty of Economics, Cambridge University, Sidgwick Avenue, Cambridge CB3 9DD, United Kingdom; hamid.sabourian@econ.cam.ac.uk
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    • This manuscript is a substantially revised and generalized version of our earlier paper “Herd Behavior in Efficient Financial Markets.” Financial support from the ESRC (Grants RES-156-25-0023 and R00429934339) and the TMR Marie Curie Fellowship Program is gratefully acknowledged. Andreas thanks the University of Copenhagen for its hospitality while some of this research was developed. We thank three anonymous referees for detailed comments, and the co-editor for very helpful suggestions and advice. We are also grateful to Markus Brunnermeier, Christophe Chamley, Tony Doblas-Madrid, Scott Joslin, Rob McMillan, Peter Sorensen, and Wei Xiong for helpful discussions. Finally, we thank seminar participants at the following conferences, workshops, and departments for useful comments: St. Andrews ESRC Macro, Gerzensee Economic Theory, SAET Vigo Spain, ESRC World Economy Birkbeck, ESRC British Academy Joint Public Policy Seminar, Cambridge–Princeton Workshop, Cambridge Social Learning Workshop, Copenhagen Informational Herding Workshop, CEA, NFA, Said Oxford, St. Andrews, Leicester, Nottingham, Queen Mary London, Cambridge, LSE Finance, Naples, EUI Florence, Paris School of Economics, Yonsei Korea, Singapore National University, Singapore Management University, Queens, Rotman Toronto, Penn State, and Wharton.


Rational herd behavior and informationally efficient security prices have long been considered to be mutually exclusive but for exceptional cases. In this paper we describe the conditions on the underlying information structure that are necessary and sufficient for informational herding and contrarianism. In a standard sequential security trading model, subject to sufficient noise trading, people herd if and only if, loosely, their information is sufficiently dispersed so that they consider extreme outcomes more likely than moderate ones. Likewise, people act as contrarians if and only if their information leads them to concentrate on middle values. Both herding and contrarianism generate more volatile prices, and they lower liquidity. They are also resilient phenomena, although by themselves herding trades are self-enforcing whereas contrarian trades are self-defeating. We complete the characterization by providing conditions for the absence of herding and contrarianism.