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Taking the road less traveled by: Does conversation eradicate pernicious cascades?

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  • Cao, H. Henry
  • Han, Bing
  • Hirshleifer, David

Abstract

We offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads, despite communication of the payoff outcomes from past choices. This reflects both direct and indirect action-based information externalities. In contrast with previous cascades literature, cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever. Furthermore, the ability of individuals to communicate can reduce average decision accuracy and welfare.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 146 (2011)
Issue (Month): 4 (July)
Pages: 1418-1436

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Handle: RePEc:eee:jetheo:v:146:y:2011:i:4:p:1418-1436

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Information cascades Network communications Long-run efficiency;

References

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Citations

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Cited by:
  1. Tao Wang, 2011. "Dynamic Equilibrium Bunching," Working Papers 1291, Queen's University, Department of Economics.
  2. J. Daniel Aromí, 2013. "Pre-play Research in a Model of Bank Runs," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 59, pages 57-86, January-D.
  3. Kaustia, Markku & Knüpfer, Samuli, 2012. "Peer performance and stock market entry," Journal of Financial Economics, Elsevier, vol. 104(2), pages 321-338.

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