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Rational and Naive Herding

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  • Rabin, Matthew
  • Eyster, Erik

Abstract

In social-learning environments, we investigate implications of the assumption that people naively believe that each previous person's action reflects solely that person's private information, leading them to systematically imitate all predecessors even in the many circumstances where rational agents do not. Naive herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. They herd with positive probability on incorrect actions across a broad array of rich-information settings where rational players never do, and---because they become fully confident even when wrong---can be harmed on average by observing others.

Suggested Citation

  • Rabin, Matthew & Eyster, Erik, 2009. "Rational and Naive Herding," CEPR Discussion Papers 7351, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7351
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    References listed on IDEAS

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    7. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927.
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    Cited by:

    1. Anthony Ziegelmeyer & Frédéric Koessler & Juergen Bracht & Eyal Winter, 2010. "Fragility of information cascades: an experimental study using elicited beliefs," Experimental Economics, Springer;Economic Science Association, vol. 13(2), pages 121-145, June.
    2. Matthew Gentzkow & Jesse M. Shapiro & Michael Sinkinson, 2011. "The Effect of Newspaper Entry and Exit on Electoral Politics," American Economic Review, American Economic Association, vol. 101(7), pages 2980-3018, December.
    3. Partha Gangopadhyay, 2011. "Decision Making in Ignorance and Consequent Market Outcomes: Equilibrium Analysis," Modern Applied Science, Canadian Center of Science and Education, vol. 5(3), pages 1-3, June.

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    More about this item

    Keywords

    Cursed equiliibrium; Herding; Naive inference; Social learning;
    All these keywords.

    JEL classification:

    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other

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