Market Crowds between Imitation and Control

IT HAS often been pointed out that financial markets are like a crowd(e.g. Menschel, 2002; Smith, 1999; Tvede, 2002). Calm one minute, atidal flow of affect might be unleashed the next, causing spectacular market movements. Indeed ‘the crowd ’ is a piece of standard trading lingo: the crowd is the group of traders squeezed together on trading floors and trading pits in open-outcry markets (Baker, 1984). In electronic markets there is no crowd in the traditional sense, but traders still seek company, either on trading floors or in arcades, simply because getting a direct visual and audio input from the other market players is key to knowing the mood of the market (Arnoldi, 2006; Coval and Shumway, 2001; Sassen, 2004; 2005; see also Zwick, 2005 for a discussion of affect in electronic markets). The question which this article discusses is the relationship between individual agency and crowd behavior. With crowd behavior we mean above all unconscious, non-rational imitation in the sense of instinctive and affec-tive behavior. One of the prominent suggestions of classical crowd theory (partly adapted by behavioral finance theory) is that people are hypnotized to behave irrationally and affectively when they become part of a crowd. In financial markets this would mean that market participants imitate others, hence not only moving with the flow of the market, but also reinforcing it. We will examine this process of imitation which crowd theory describes so brilliantly, arguing that the uncertainty of financial markets often creates such mass imitation. However, it is important not to reduce market behavior to mere unconscious imitation. The conscious behavior, which also exists, is however not as individual or atomistic as economic theorists want us to believe. We will show that there also are social rules, social hierarchies and social strategies in play in market crowds. This leads us to argue that