Visual Attention, Incentives, and Herding: Insights from a Laboratory Asset Trading Game

This study investigates how visual attention and the structure of financial incentives influence herd behavior in a controlled laboratory experiment. Using eye-tracking technology, we examine how participants allocate attention to information on the trades of other participants (others’ decisions) and the redemption value of the asset (private information) under linear and tournament incentives. Experimental results show that when information is conflicting, tournament incentives lead to increased attention to others’ decisions and traders follow the decisions of others more frequently, compared to linear incentives. We extend traditional econometric analysis by estimating a drift diffusion model (DDM) to analyze traders’ decision-making processes. The DDM reveals that visual attention directly influences how traders accumulate decision-relevant information, resulting in faster and stronger shifts toward herding with tournament incentives. Furthermore, under tournament incentives participants start the decision process with greater initial tendency to herd. Our findings provide evidence that incentive structures shape decision-making by influencing attentional priorities.