Saturation Effect and Cyclical Herd Behavior
AbstractWe analyze a sequential decision model, where in every period a new agent seeks to determine the payoff of some actions. Every agent receives a possibly uninformative signal about the payoffs, and she observes previous choices. Some actions have a saturation effect; i.e., their payoffs become zero if used repeatedly too often albeit the original payoff is recovered later. We show that in every equilibrium and for almost every equilibrium play path, an action will trigger a cyclical herd behavior. We also show that the length of the transition phase between two consecutive herd behavior is at most the time needed to recover from the saturation effect. We thus give an alternative explanation to Kirman (1993) for the cyclicity of herd behavior, based on the negative externality generated by the repeated use of the same action.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1690906.
Length: 14 pages
Date of creation: 2006
Date of revision:
Herd behavior; Cycles; Saturation effects.;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992.
"A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades,"
Journal of Political Economy,
University of Chicago Press, vol. 100(5), pages 992-1026, October.
- 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.
- Scharfstein, David. & Stein, Jeremy C., 1988.
"Herd behavior and investment,"
WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
- Kirman, Alan, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 137-56, February.
If references are entirely missing, you can add them using this form.