Herding behavior of financial analysts: A model of self-organized criticality
Krause, A., 2004. Herding behavior of financial analysts: A model of self-organized criticality. In: The Complex Dynamics of Economic Interaction. Vol. 531, Part 4. Springer-Verlag, pp. 257-267. (Lecture Notes in Economics and Mathematical Systems)
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We investigate a simple model of investment recommendations issued by financial analysts in different industries. Financial analysts are influenced by the recommendations of some of their colleagues in the same industry as well as their own recommendations in certain other industries. Describing the relations with other financial analysts and among industries as a graph, we derive the complex dynamics of investment recommendations as relations change over time according to a simple rule, resulting in self-organized criticality. We show that financial analysts are more likely to be optimistic about industries that are unrelated to other industries than about industries that are related to others.
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