Information Processing

In the paper presented in this ZEW Research Seminar, the authors experimentally examine the mechanisms underlying peer effects in financial markets. They hypothesize that individuals are not too confident about how to process information regarding financial markets and thus look among their peers for someone who is more capable in processing the information - an expert. The experimental evidence supports this hypothesis: Subjects with lower confidence in their decisions follow their peers more often and peers with higher expertise are followed more often. In the experimental design peers do not possess additional information to ensure that the results are driven by the ability to process common information. The authors therefore introduce a new channel to the peer effects literature - information processing.