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Do We Follow Private Information when We Should? Laboratory Evidence on Naive Herding

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  • Christoph March

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Sebastian Krügel

    (Max Planck Institute of Economics - Max Planck Institute of Economics)

  • Anthony Ziegelmeyer

    (Max Planck Institute of Economics - Max Planck Institute of Economics)

Abstract

We investigate whether experimental participants follow their private information and contradict herds in situations where it is empirically optimal to do so. We consider two sequences of players, an observed and an unobserved sequence. Observed players sequentially predict which of two options has been randomly chosen with the help of a medium quality private signal. Unobserved players predict which of the two options has been randomly chosen knowing previous choices of observed and with the help of a low, medium or high quality signal. We use preprogrammed computers as observed players in half the experimental sessions. Our new evidence suggests that participants are prone to a 'social-confirmation' bias and it gives support to the argument that they naively believe that each observable choice reveals a substantial amount of that person's private information. Though both the 'overweighting-of-private-information' and the 'social-con firmation' bias coexist in our data, participants forgo much larger parts of earnings when herding naively than when relying too much on their private information. Unobserved participants make the empirically optimal choice in 77 and 84 percent of the cases in the human-human and computer-human treatment which suggests that social learning improves in the presence of lower behavioral uncertainty.

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Paper provided by HAL in its series PSE Working Papers with number halshs-00671378.

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Date of creation: Feb 2012
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Handle: RePEc:hal:psewpa:halshs-00671378

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Keywords: Information cascades ; Laboratory Experiments ; Naive herding;

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References

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  1. Adeline Delavande, 2008. "Measuring revisions to subjective expectations," Journal of Risk and Uncertainty, Springer, Springer, vol. 36(1), pages 43-82, February.
  2. R. McKelvey & T. Palfrey, 2010. "Quantal Response Equilibria for Normal Form Games," Levine's Working Paper Archive 510, David K. Levine.
  3. Anthony Ziegelmeyer & Christoph March & Sebastian Krügel, 2012. ""Do We Follow Others when We Should? A Simple Test of Rational Expectations": Comment," Jena Economic Research Papers, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics 2012-006, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  4. Frederic Koessler & Anthony Ziegelmeyer & Juergen Bracht & Eyal Winter, 2008. "Fragility of Information Cascades: An Experimental Study using Elicited Beliefs," Jena Economic Research Papers, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics 2008-094, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  5. Jacob Goeree & Thomas Palfrey & Brian Rogers, 2004. "Self-Correcting Information Cascades," Levine's Bibliography 122247000000000153, UCLA Department of Economics.
  6. repec:hal:wpaper:halshs-00572528 is not listed on IDEAS
  7. Marco Cipriani & Antonio Guarino, 2008. "Herd Behavior in Financial Markets," IMF Working Papers, International Monetary Fund 08/141, International Monetary Fund.
  8. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  9. Andrew Chesher, 2008. "Instrumental variable models for discrete outcomes," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP30/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  10. Weizsäcker, Georg, 2008. "Do We Follow Others When We Should? A Simple Test of Rational Expectations," IZA Discussion Papers 3616, Institute for the Study of Labor (IZA).
  11. repec:bla:restud:v:74:y:2007:i:3:p:733-762 is not listed on IDEAS
  12. repec:wop:humbsf:2001-3 is not listed on IDEAS
  13. Christoph March & Anthony Ziegelmeyer, 2009. "Behavioral Social Learning," Jena Economic Research Papers, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics 2009-105, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  14. Richard Mckelvey & Thomas Palfrey, 1998. "Quantal Response Equilibria for Extensive Form Games," Experimental Economics, Springer, Springer, vol. 1(1), pages 9-41, June.
  15. Anderson, Lisa R & Holt, Charles A, 1997. "Information Cascades in the Laboratory," American Economic Review, American Economic Association, American Economic Association, vol. 87(5), pages 847-62, December.
  16. Christoph March, 2011. "Adaptive social learning," PSE Working Papers, HAL halshs-00572528, HAL.
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Cited by:
  1. 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, American Economic Association, vol. 103(6), pages 2633-42, October.

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