Title: Information cascades, herding and emotional investors in an IPO: Rational decision-making distorted by phantasy
Authors: Richard Fairchild - University of Bath (United Kingdom) [presenting]
Abstract: The aim is to add to existing Information Cascade Models and Emotional Finance by developing a herding model that examines the effects of phantastic investors on the decisions of rational investors under dynamic pricing in an IPO scenario. The presence of irrational, phantastic herding in an IPO scenario leads to price inflation caused by irrationality. This reduces the likelihood of rational investors taking part in a new issue. Positive cascades by rational investors are completely eliminated when emotional investors view the new issue as infallible, and in some cases, negative abstaining cascades happen with certainty, regardless of previous rational investors decisions. When emotional investors are overcome by hatred towards the new issue, rational investors are now encouraged to invest in a new issue and, in some cases, will ignore their private information in order to conform with previous rational investors decisions. Thus, emotional investors cause the market to be stressed as they all herd, initially by investing and then abstaining. We find that herding in times of market stress by emotional investors can lead to rational herding, but in the opposite direction.