Information Aggregation with Random Ordering: Cascades and Overconfidence

In economic models, it is usually assumed that agents aggregate their private information with all available public information correctly and completely. In this experiment, we identify subjects' updating procedures and analyse the consequences for the aggregation process. Decisions can be base...

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Bibliographic Details
Published inThe Economic journal (London) Vol. 113; no. 484; pp. 166 - 189
Main Authors Nöth, Markus, Weber, Martin
Format Journal Article
LanguageEnglish
Published Oxford, UK Blackwell Publishing 01.01.2003
Blackwell Publishers
Oxford University Press
Subjects
Aggregation
Bayesian analysis
Cluster analysis
Confidence
Data quality
Decision making
Econometrics
Economic models
Error rates
Herding
Heuristics
Information
Information economics
Memory interference
Microeconomics
Participant observation
Probability
Public information
Questionnaires
Online AccessGet full text
ISSN0013-0133
1468-0297
DOI10.1111/1468-0297.00091

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Summary:In economic models, it is usually assumed that agents aggregate their private information with all available public information correctly and completely. In this experiment, we identify subjects' updating procedures and analyse the consequences for the aggregation process. Decisions can be based on private information with known quality and on the observed decisions of other participants. In this setting with random ordering, information cascades are observable and agents' overconfidence has a positive effect on avoiding a non-revealing aggregation process. However, overconfidence reduces welfare in general.
Bibliography:istex:CD9FE89C6A60BCB2801CD00781DF9B32FF7CE4AA
ark:/67375/WNG-V843GRD3-2
The authors gratefully acknowledge the financial support for this research which was provided by the Deutsche Forschungsgemeinschaft (grants No381/1 and We993/7). Carlo Kraemer and Tobias Kremer programmed the software for this project. Helpful comments were received from two anonymous referees, David de Meza (the editor), Rachel Croson, Wolfgang Gerke, Charles Holt, Susanne Prantl and participants at the Economic Science Association 1998 meeting, the European Finance Association 1999 meeting and at the Wharton Finance Micro Lunch seminar.
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ISSN:0013-0133
1468-0297
DOI:10.1111/1468-0297.00091