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Do We Follow Others When We Should? A Simple Test of Rational Expectations

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  • Georg Weizsacker

Abstract

The paper presents a meta dataset covering 13 experiments on social learning games. It is found that in situations where it is empirically optimal to follow others and contradict one's own information, the players err in the majority of cases, forgoing substantial parts of earnings. The average player contradicts her own signal only if the empirical odds ratio of the own signal being wrong, conditional on all available information, is larger than 2:1, rather than 1:1 as would be implied by rational expectations. A regression analysis formulates a straightforward test of rational expectations which strongly rejects the null. (JEL D82, D83, D84)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 100 (2010)
Issue (Month): 5 (December)
Pages: 2340-60

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Handle: RePEc:aea:aecrev:v:100:y:2010:i:5:p:2340-60

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References

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  1. Mathias Drehmann & Jörg Oechssler, 2004. "Herding and Contrarian Behavior in Financial Markets - An Internet Experiment," Econometric Society 2004 North American Winter Meetings 55, Econometric Society.
  2. Weizsäcker, Georg, 2003. "Ignoring the rationality of others: evidence from experimental normal-form games," Open Access publications from London School of Economics and Political Science http://eprints.lse.ac.uk/, London School of Economics and Political Science.
  3. Dorothea Kübler & Georg Weizsäcker, 2005. "Are Longer Cascades More Stable?," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 330-339, 04/05.
  4. Steffen Huck & Hans-Theo Normann & Jörg Oechssler, 2001. "Two are Few and Four are Many: Number Effects in Experimental Oligopolies," Bonn Econ Discussion Papers bgse12_2001, University of Bonn, Germany.
  5. Huck, Steffen & Oechssler, Jorg, 2000. "Informational cascades in the laboratory: Do they occur for the right reasons?," Journal of Economic Psychology, Elsevier, vol. 21(6), pages 661-671, December.
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  7. Anderson, Lisa R, 2001. "Payoff Effects in Information Cascade Experiments," Economic Inquiry, Western Economic Association International, vol. 39(4), pages 609-15, October.
  8. Hessel Oosterbeek & Randolph Sloof & Gijs van de Kuilen, 2004. "Cultural differences in ultimatum game experiments: Evidence from a meta-analysis," Experimental 0401003, EconWPA.
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  11. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  12. Dorothea Kübler & Georg Weizs�cker, 2004. "Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 425-441.
  13. Dorothea K¸bler & Georg Weizs”cker, 2004. "Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 425-441, 04.
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  15. Guarino, Antonio & Harmgart, Heike & Huck, Steffen, 2011. "Aggregate information cascades," Games and Economic Behavior, Elsevier, vol. 73(1), pages 167-185, September.
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  18. Syngjoo Choi & Douglas Gale & Shachar Kariv, 2005. "Learning in Networks: An Experimental Study," Levine's Bibliography 122247000000000044, UCLA Department of Economics.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Repubblica e il vincolismo
    by Alberto Bagnai in Goofynomics on 2012-06-16 20:49:00
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Cited by:
  1. Mark Armstrong & Steffen Huck, 2010. "Behavioral Economics as Applied to Firms: A Primer," CPI Journal, Competition Policy International, vol. 6.
  2. Anthony Ziegelmeyer & Christoph March & Sebastian Krügel, 2012. ""Do We Follow Others when We Should? A Simple Test of Rational Expectations": Comment," Jena Economic Research Papers 2012-006, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  3. Egebark, Johan & Ekström, Mathias, 2011. "Like What You Like or Like What Others Like? Conformity and Peer Effects on Facebook," Working Paper Series 886, Research Institute of Industrial Economics.
  4. Antonio Guarino & Philippe Jehie, 2009. "Social Learning with Coarse Inference," Levine's Working Paper Archive 814577000000000292, David K. Levine.
  5. Stefania Sitzia & Robert Sugden, 2011. "Implementing theoretical models in the laboratory, and what this can and cannot achieve," Journal of Economic Methodology, Taylor and Francis Journals, vol. 18(4), pages 323-343, December.
  6. Christoph Engel, 2011. "Dictator games: a meta study," Experimental Economics, Springer, vol. 14(4), pages 583-610, November.
  7. Christoph March & Sebastian Krügel & Anthony Ziegelmeyer, 2012. "Do We Follow Private Information when We Should? Laboratory Evidence on Naive Herding," PSE Working Papers halshs-00671378, HAL.
  8. Antonio Guarino & Philippe Jehiel, 2009. "Social Leanring with Course Inference," WEF Working Papers 0050, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  9. Fahr, René & Irlenbusch, Bernd, 2011. "Who follows the crowd—Groups or individuals?," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 200-209.
  10. Christoph March, 2011. "Adaptive social learning," PSE Working Papers halshs-00572528, HAL.
  11. Christoph March & Sebastian Krügel & Anthony Ziegelmeyer, 2012. "Do We Follow Private Information when We Should? Laboratory Evidence on Naive Herding," Working Papers halshs-00671378, HAL.
  12. Christoph March, 2011. "Adaptive social learning," Working Papers halshs-00572528, HAL.

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