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The Right Choice at the Right Time: A Herding Experiment in Endogenous Time

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  • Daniel Sgroi

Abstract

This paper examines experimental evidence relating to herd behaviour in situations when subjects can learn from each other, and can delay their decision. Subjects acted rationally, gaining from observational learning, despite penalties for delay. Cascades were ubiquitous and reverse-cascades occurred in which incorrect decisions made by early decision-makers produced herds on the incorrect choice. The major departure from rationality cam when subjects realized they had chosen incorrectly despite following the majority view. This led many to add extra delay to future decision-making. It is argued that this may be due to certain cognitive biases, and is likely to make matters worse, making it all the more important that policy-makers attempt to minimize the change of reverse-cascades.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2000/w15/W15.pdf
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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2000-W15.

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Date of creation: 01 Mar 2000
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Handle: RePEc:oxf:wpaper:2000-w15

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Keywords: learning; herding; delay; experiments;

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  1. Angela A. Hung & Charles R. Plott, 2001. "Information Cascades: Replication and an Extension to Majority Rule and Conformity-Rewarding Institutions," American Economic Review, American Economic Association, American Economic Association, vol. 91(5), pages 1508-1520, December.
  2. Sgroi, D., 2000. "Optimizing Information in the Herd: Guinea Pigs, Profit and Welfare," Economics Papers 2000-w14, Economics Group, Nuffield College, University of Oxford.
  3. 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.
  4. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
  5. John Hey & Louise Allsopp, . "Two Experiments to Test a Model of Herd Behaviour," Discussion Papers, Department of Economics, University of York 99/24, Department of Economics, University of York.
  6. Camerer, Colin & Weigelt, Keith, 1991. "Information Mirages in Experimental Asset Markets," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 64(4), pages 463-93, October.
  7. 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, American Economic Association, vol. 12(3), pages 151-170, Summer.
  8. Akerlof, George A & Yellen, Janet L, 1987. "Rational Models of Irrational Behavior," American Economic Review, American Economic Association, American Economic Association, vol. 77(2), pages 137-42, May.
  9. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 695-732, June.
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