Effects of third person perception and information system on stock market crash

Abstract

Switching stock market trading strategies between price trading and trend following can be heavily affected by how one trader anticipates other traders' behavior. This paper suggests an agent based model which allows agents to be under effect of third-person perception and to use external information system such as search engines and social network services which provide information on other traders' tendencies. The analysis shows heavy third person perception can trigger positive feedback to market crash, while light or no third person perception may trigger positive feedback to market stabilization. External information system may interact with third person perception and hasten or delay triggering positive feedback, according to the quality of the system. This paper adds two different yet closely related considerations to current understandings on how price traders and trend followers interacts each other: third person perception and information systems quality. The managers should be aware of that information on third person from new information technology such as Facebook may either improve or harm the stability of a collective behavior.