Naïïve Herding in Rich-Information Settings

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

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Bibliographic Details
Published inAmerican economic journal. Microeconomics Vol. 2; no. 4; p. 221
Main Authors Eyster, Erik, Rabin, Matthew
Format Journal Article
LanguageEnglish
Published Pittsburgh American Economic Association 01.11.2010
Subjects
Economic models
Economic theory
Economics
Farmers
Information
Learning
Microeconomics
Microelectronics
Rationality
Studies
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Summary:In social-learning environments, we investigate implications of the assumption that people naïïvely believe that each previous person's action reflects solely that person's private information. Naïïve 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, naïïve herders can be harmed, on average, by observing others. (JEL D82, D83) [PUBLICATION ABSTRACT]
ISSN:1945-7669
1945-7685
DOI:10.1257/mic.2.4.221