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Fragility of information cascades: an experimental study using elicited beliefs

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Author Info

  • Anthony Ziegelmeyer

    ()

  • Frédéric Koessler

    ()

  • Juergen Bracht

    ()

  • Eyal Winter

    ()

Abstract

This paper examines the occurrence and fragility of information cascades in laboratory experiments. One group of low informed subjects make predictions in sequence. In a matched pairs design, another set of high informed subjects observe the decisions of the first group and make predictions. According to the theory of information cascades (Bikhchandani, Hirshleifer, and Welch, 1992), if initial decisions coincide, an information cascade should occur: it is rational for subsequent players with low quality information to follow the observed pattern regardless of their private information. However, an information cascade should be fragile: it is always rational for subsequent players with high quality information to follow their private information. In line with existing experiments on information cascades, we find some evidence that low informed subjects follow the herd when it is rational, and this herding behavior occurs more frequently if there is a pronounced imbalance. The main finding of this paper is that information cascades are not fragile. We find strong evidence that highly informed subjects follow the herd regardless of their private information. In accordance with those observations we show, by explicitly eliciting subjects' beliefs about the state, that beliefs are not constant in the number of previous decisions that coincide, whether or not an information cascade already occurred. Subjects' behavior can be understood with a statistical model that allows for the possibility of errors in earlier decisions.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Springer in its journal Experimental Economics.

Volume (Year): 13 (2010)
Issue (Month): 2 (June)
Pages: 121-145

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Handle: RePEc:kap:expeco:v:13:y:2010:i:2:p:121-145

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Web page: http://www.springerlink.com/link.asp?id=102888

Related research

Keywords: Information cascades; Fragility; Elicited beliefs; Depth-of-reasoning analysis; Experimental economics; C72; C92; D82;

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References

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  1. Anderson, Lisa R, 2001. "Payoff Effects in Information Cascade Experiments," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 39(4), pages 609-15, October.
  2. Philip A. Haile & Ali Hortacsu & Grigory Kosenok, 2004. "On the Empirical Content of Quantal Response Equilibrium," Yale School of Management Working Papers, Yale School of Management ysm421, Yale School of Management.
  3. Anderson, Lisa R. & Holt, Charles A., 2008. "Information Cascade Experiments," Handbook of Experimental Economics Results, Elsevier, Elsevier.
  4. 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.
  5. Goeree, Jacob & Palfrey, Thomas & Rogers, Brian & McKelvey, Richard, 2004. "Self-correcting Information Cascades," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 1197, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Daron Acemoglu & Munther A. Dahleh & Ilan Lobel & Asuman Ozdaglar, 2011. "Bayesian Learning in Social Networks," Review of Economic Studies, Oxford University Press, vol. 78(4), pages 1201-1236.
  7. Blanco, Mariana & Engelmann, Dirk & Koch, Alexander K. & Normann, Hans-Theo, 2008. "Belief Elicitation in Experiments: Is there a Hedging Problem?," IZA Discussion Papers 3517, Institute for the Study of Labor (IZA).
  8. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
  9. Dorothea Kübler & Georg Weizsäcker, 2005. "Are Longer Cascades More Stable?," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(2-3), pages 330-339, 04/05.
  10. Plott, Charles & Hung, Angela, 1998. "Information Cascades: Replication and an Extension to Majority Rule and Conformity Rewarding Institutions," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 1051, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. Kraemer, Carlo & Noth, Markus & Weber, Martin, 2006. "Information aggregation with costly information and random ordering: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 423-432, March.
  12. Yaw Nyarko & Andrew Schotter, 2002. "An Experimental Study of Belief Learning Using Elicited Beliefs," Econometrica, Econometric Society, Econometric Society, vol. 70(3), pages 971-1005, May.
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Cited by:
  1. Neri, Claudia & Manski, Charles, 2012. "First- and Second-order Subjective Expectations in Strategic Decision-Making: Experimental Evidence," Economics Working Paper Series 1206, University of St. Gallen, School of Economics and Political Science.
  2. repec:hal:wpaper:halshs-00671378 is not listed on IDEAS
  3. Anthony Ziegelmeyer & Christoph March & Sebastian Kr?gel, 2013. "Do We Follow Others When We Should? A Simple Test of Rational Expectations: Comment," American Economic Review, American Economic Association, vol. 103(6), pages 2633-42, October.
  4. 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.
  5. J. Aislinn Bohren, 2013. "Informational Herding with Model Misspecification," PIER Working Paper Archive 14-007, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. repec:hal:wpaper:halshs-00572528 is not listed on IDEAS
  7. Meub, Lukas & Proeger, Till & Hüning, Hendrik, 2013. "A comparison of endogenous and exogenous timing in a social learning experiment," Center for European, Governance and Economic Development Research Discussion Papers 167, University of Goettingen, Department of Economics.
  8. Christoph March, 2011. "Adaptive social learning," PSE Working Papers halshs-00572528, HAL.

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