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Information Aggregation with Random Ordering: Cascades and Overconfidence

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  • Markus Noeth

    (University of Mannheim)

  • Martin Weber

    (University of Mannheim)

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    Abstract

    In economic models, it is usually assumed that agents aggregate their private and all available public information correctly and completely. In this experiment, we identify subjects' updating procedures and analyze the consequences for the aggregation process. Decisions can be based on private information with known quality and observed decisions of other participants. In this setting with random ordering, information cascades are observable and agents' overconfidence has a positive effect on avoiding a non-revealing aggregation process but it reduces welfare in general.

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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1592.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1592

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    1. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    2. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
    3. 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.
    4. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
    5. 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.
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    7. Lee, In Ho, 1998. "Market Crashes and Informational Avalanches," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 741-59, October.
    8. Camerer, Colin, 1989. " Bubbles and Fads in Asset Prices," Journal of Economic Surveys, Wiley Blackwell, vol. 3(1), pages 3-41.
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    10. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
    11. Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers 05-97, Wharton School Rodney L. White Center for Financial Research.
    12. Gul, Faruk & Lundholm, Russell, 1995. "Endogenous Timing and the Clustering of Agents' Decisions," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 1039-66, October.
    13. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
    14. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
    15. 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.
    16. KENT D. DANIEL & David Hirshleifer & AVANIDHAR SUBRAHMANYAM, 2004. "A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions," Finance 0412006, EconWPA.
    17. David Porter & Vernon Smith, 1994. "Stock market bubbles in the laboratory," Applied Mathematical Finance, Taylor & Francis Journals, vol. 1(2), pages 111-128.
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    Cited by:
    1. Dennis Dittrich & Werner Güth & Boris Maciejovsky, . "Overconfidence in Investment Decisions: An Experimental Approach," Papers on Strategic Interaction 2001-03, Max Planck Institute of Economics, Strategic Interaction Group.
    2. Shunichiro Sasaki, 2004. "Signal Qualities, Order of Decisions, and Informational Cascades: Experimental Evidences," ISER Discussion Paper 0621, Institute of Social and Economic Research, Osaka University.

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