The effect of macroscopic herd inputs on individual investment behaviour

Abstract

Abstract The influence of others' behaviour on our own is pervasive and is often argued to result from an information cascade, where decisions in a sequential setting are influenced by the early decisions of others. However, the degree to which individuals modify behaviour through the integration of social information (i.e. other people’s decisions) varies significantly between individuals. We propose that the scale and longevity of the herd itself at the time when an individual decides, defined as macroscopic herd inputs, significantly influences whether individuals integrate social information. To observe the influence of macroscopic herd inputs on behaviour we employ data from a social trading platform finding that it exerts a strong linear influence on individual investment decisions. The effect of information cascades on individual behaviour is therefore dependent not only on personal factors but also on macroscopic herd inputs that shape the degree to which an individual integrates social information.