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Naïve Herding in Rich-Information Settings

Author

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  • Erik Eyster
  • Matthew Rabin

Abstract

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. (JEL D82, D83)

Suggested Citation

  • Erik Eyster & Matthew Rabin, 2010. "Naïve Herding in Rich-Information Settings," American Economic Journal: Microeconomics, American Economic Association, vol. 2(4), pages 221-243, November.
    • Handle: RePEc:aea:aejmic:v:2:y:2010:i:4:p:221-43
    Note: DOI: 10.1257/mic.2.4.221
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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