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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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Bibliographic Info

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. Andrew Chesher, 2008. "Instrumental variable models for discrete outcomes," CeMMAP working papers CWP30/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  2. Frederic Koessler & Anthony Ziegelmeyer & Juergen Bracht & Eyal Winter, 2008. "Fragility of Information Cascades: An Experimental Study using Elicited Beliefs," Jena Economic Research Papers 2008-094, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  3. Goeree, Jacob & Palfrey, Thomas & Rogers, Brian & McKelvey, Richard, 2004. "Self-correcting Information Cascades," Working Papers 1197, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. R. McKelvey & T. Palfrey, 2010. "Quantal Response Equilibria for Normal Form Games," Levine's Working Paper Archive 510, David K. Levine.
  5. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  6. Adeline Delavande, 2005. "Measuring Revisions to Subjective Expectations," 2005 Meeting Papers 682, Society for Economic Dynamics.
  7. Richard Mckelvey & Thomas Palfrey, 1998. "Quantal Response Equilibria for Extensive Form Games," Experimental Economics, Springer, vol. 1(1), pages 9-41, June.
  8. Georg Weizsacker, 2010. "Do We Follow Others When We Should? A Simple Test of Rational Expectations," American Economic Review, American Economic Association, vol. 100(5), pages 2340-60, December.
  9. 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.
  10. repec:bla:restud:v:74:y:2007:i:3:p:733-762 is not listed on IDEAS
  11. repec:wop:humbsf:2001-3 is not listed on IDEAS
  12. 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 2012-006, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  13. Christoph March, 2011. "Adaptive social learning," PSE Working Papers halshs-00572528, HAL.
  14. Marco Cipriani & Antonio Guarino, 2008. "Herd Behavior in Financial Markets," IMF Working Papers 08/141, International Monetary Fund.
  15. repec:hal:wpaper:halshs-00572528 is not listed on IDEAS
  16. Christoph March & Anthony Ziegelmeyer, 2009. "Behavioral Social Learning," Jena Economic Research Papers 2009-105, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
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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, vol. 103(6), pages 2633-42, October.

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