Study on Herding Equilibrium of Irrational Informed Trader

This paper studies the connection between the irrational behavior of traders and the herding equilibrium of informed traders in security market. At first, we set up the trading system on the condition of market maker, establish a trading model of perfectly rational traders, and then define herding equilibrium. Second, we extend the model using two parameters, and find the critical points of irrational traders when they reach the herding equilibrium. The result indicates that herding never occurs in market if all the traders are perfectly rational. If consider their irrational factor, it maybe arouse herding. Besides, along with the number of traders who make the same trading strategies increasing, the two critical points show some rules.