Abstract
In this paper, the traditional model of herd behavior was improved and extended. The herd behavior of risk-averse investor based on information cost was studied in the financial market. By refining the concept of Bayes equilibrium and the analysis of the behavior of investors, it was discovered that the herd behavior of the second risk-averse investor did not produce until the first risk-averse investors chose to buy information.
Highlights
Herding behavior of financial markets refers that the majority of individual investors tend to take the same or similar investment strategy with the others when making investment decisions
Causes of herd behavior include information asymmetry, the concern for the reputation and rewards programs (Sharma & Bikhchandani, 2000), where the information asymmetry caused by the spread of information is an important reason for herd behavior
As BHW model assumes that investors can get free private information, Cui Wei (2008) for the real market, raised the cost of herd behavior based on the information model, BHW model assumes that investors are risk neutral, in which most investors in financial markets do not match the characteristics of risk aversion
Summary
Received November 11th, 2013; revised December 11th, 2013; accepted December 18th, 2013. The traditional model of herd behavior was improved and extended. The herd behavior of risk-averse investor based on information cost was studied in the financial market. By refining the concept of Bayes equilibrium and the analysis of the behavior of investors, it was discovered that the herd behavior of the second risk-averse investor did not produce until the first risk-averse investors chose to buy information
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