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On the absorbability of informational cascades in the laboratory

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  • Morone, Andrea
  • Sandri, Serena
  • Fiore, Annamaria

Abstract

This paper aims in investigating the recursive effects of economic theories on the behaviour of bounded rational individuals and tests in the context of informational cascades the absorbability of theories of rational choice among bounded rational decision-makers. A theory is said to be absorbable whenever its logical and prescriptive content is accepted by individuals that choose to act according to it. This accounts for strategic equilibria and can be related to the logic underlying convergence of behaviour and intentional herding in sequential games. This paper discusses the causal role of theories on bounded rational decision-making and analyses in an experimental setting whether providing individuals with theoretical information on informational cascades affects overall probability of herding phenomena to occur as well as whether an incorrect cascade can be reversed. Findings confirm that revealing the theoretical principle of Bayesian optimization improves the degree of social efficiency, enlarges average earnings as well as the percentage of winning per position in the queue.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics).

Volume (Year): 38 (2009)
Issue (Month): 5 (October)
Pages: 728-738

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Handle: RePEc:eee:soceco:v:38:y:2009:i:5:p:728-738

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Web page: http://www.elsevier.com/locate/inca/620175

Related research

Keywords: Theory absorption Herd behaviour Informational cascades;

References

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  1. Andrea Morone & Serena Sandri & Tobias Uske, 2007. "On the absorbability of the Guessing Game Theory. A Theoretical and Experimental Analysis," series 0017, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Apr 2007.
  2. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
  3. Werner Güth & Hartmut Kliemt, 2004. "Bounded Rationality and Theory Absorption," Homo Oeconomicus, Institute of SocioEconomics, vol. 21, pages 521-541.
  4. Welch, Ivo, 2000. "Herding among security analysts," Journal of Financial Economics, Elsevier, vol. 58(3), pages 369-396, December.
  5. Andrea Morone & Eleni Samanidou, 2007. "A simple note on Herd Behaviour," series 0013, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Feb 2007.
  6. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  7. Gary S. Becker, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," University of Chicago - George G. Stigler Center for Study of Economy and State 67, Chicago - Center for Study of Economy and State.
  8. Anderson, Lisa R & Holt, Charles A, 1997. "Information Cascades in the Laboratory," American Economic Review, American Economic Association, vol. 87(5), pages 847-62, December.
  9. Zvika NEEMAN & Gerhard O. OROSEL, 1997. "Herding and the Winner's Curse in Markets with Sequential Bids," Vienna Economics Papers vie9711, University of Vienna, Department of Economics.
  10. Glenn Harrison & John List, 2004. "Field experiments," Artefactual Field Experiments 00058, The Field Experiments Website.
  11. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  12. Güth, Werner & Levati, M. Vittoria & Ploner, Matteo, 2008. "Social identity and trust--An experimental investigation," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(4), pages 1293-1308, August.
  13. Morgenstern, Oskar, 1972. "Descriptive, Predictive and Normative Theory," Kyklos, Wiley Blackwell, vol. 25(4), pages 699-714.
  14. Werner Güth & Gerlinde Fellner & Ev Martin, 2006. "Satisficing or Optimizing? - An Experimental Study," Papers on Strategic Interaction 2006-11, Max Planck Institute of Economics, Strategic Interaction Group.
  15. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
  16. Sushil Bikhchandani & Sunil Sharma, 2001. "Herd Behavior in Financial Markets," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 1.
  17. Bogaçhan Çelen & Shachar Kariv, 2004. "Distinguishing Informational Cascades from Herd Behavior in the Laboratory," American Economic Review, American Economic Association, vol. 94(3), pages 484-498, June.
  18. Coase, R H, 1974. "The Lighthouse in Economics," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 357-76, October.
  19. Fiore, Annamaria, 2009. "Experimental Economics: Some Methodological Notes," MPRA Paper 12498, University Library of Munich, Germany.
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