Does Herd Behavior Make the Market More Efficient?

Fitri Ismiyanti, Putu Anom Mahadwartha, Zunairoh, Santi Novita


This study aims to analyze information asymmetry, uncertainty to market efficiency, information asymmetry, uncertainty to herd behavior, and herd behavior to market efficiency. This study examines the gap of previous research by the testing mechanism of disseminating information using experimental design. Therefore, the relationship between herd behavior and stock market efficiency can be clearly analyzed. It exercised an experimental design that includes a stock market treatment with the help of Hand-run Double Auction software. The analytical method used was the mean difference test, which shows that information asymmetry results in herd behavior occurrence, whereas market uncertainty does not cause herding. This contrasting situation also occurs when discussing the effect of information asymmetry and market efficiency uncertainty. The experiment used informants who acted as investors and totaled 60 persons. The simulation was divided into five sessions with different manipulations. The results show that uninformed investors who knew the price formation information could quickly adjust their investment decisions. Compared to uninformed investors, the insiders’ inefficient predicted prices supported the fact that uninformed investors became smarter in capturing information contained in actual prices through trading running texts. Meanwhile, uncertainty negatively affects market efficiency, and herd behavior positively affects market efficiency. When communication permitted and herd behavior was detected, the market became more efficient. Some of the research results are contrary to the empirical studies due to smarter investors and the individual investors’ learning process. The psychological factors of each investor can also influence investment decision-making.

Keywords: experimental design, information asymmetry, uncertainty, herd behavior

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