Naïve Herding in Rich-Information Settings

In social-learning environments, we investigate implications of the assumption that people naïvely believe that each previous person's action reflects solely that person's private information. Naïve herders inadvertently over-weight early movers' private signals by neglecting that int...

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Bibliographic Details
Published inAmerican economic journal. Microeconomics Vol. 2; no. 4; pp. 221 - 243
Main Authors Eyster, Erik, Rabin, Matthew
Format Journal Article
LanguageEnglish
Published American Economic Association 01.11.2010
Subjects
Behavior modeling
Diners
Economic models
Herding
Herds
Inference
Microeconomic modeling
Microeconomics
Modeling
Observational learning
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Summary:In social-learning environments, we investigate implications of the assumption that people naïvely believe that each previous person's action reflects solely that person's private information. Naïve herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. Such "social confirmation bias" leads them to herd with positive probability on incorrect actions even in extremely rich-information settings where rational players never do. Moreover, because they become fully confident even when wrong, naïve herders can be harmed, on average, by observing others.
ISSN:1945-7669
1945-7685
DOI:10.1257/mic.2.4.221