The Psychological Backstage of the Herd Behavior in the Financial Markets and the Dynamics of the ‘Cognitive Tâtonnement’ to Market Beliefs

Abstract

This paper investigates one aspect of the herd behavior in financial markets: the cognitive mutual interaction among professional agents. Professional agents are in continuous contact and exchange information and interpretations in order to develop their expectations. We hypothesized that this exchange is very widespread and could grow in crisis situations. Data demonstrate the correctness of our hypothesis. In the second part of the paper we study a mathematical model of agents’ network in order to better comprehend the dynamics of market beliefs. The linear difference equation model shows how, under certain conditions, the expectations of financial agents can converge to a unique belief, in spite of initial differences.