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Taking the Road Less Traveled: Does Conversation Eradicate Pernicious Cascades?

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Author Info

  • Henry Cao

    (University of North Carolina)

  • David Hirshleifer

    (Fisher College of Business, Ohio State University)

Abstract

We offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads, despite being able to communicate both past payoff outcomes and the private signals underlying past choices. This reflects direct and indirect action-based informational externalities; and conversational externalities - the failure of individuals to take into account the benefits their conversations confer upon later individuals. In contrast with previous cascades literature, cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever. Furthermore, the ability of individuals to communicate can reduce average decision accuracy and welfare.

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File URL: http://128.118.178.162/eps/game/papers/0412/0412001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 0412001.

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Length: 25 pages
Date of creation: 04 Dec 2004
Date of revision:
Handle: RePEc:wpa:wuwpga:0412001

Note: Type of Document - pdf; pages: 25. PDF
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Web page: http://128.118.178.162

Related research

Keywords: informational cascades; social learning; herding; social efficiency;

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Cited by:
  1. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 2005. "Information Cascades and Observational Learning," Working Paper Series 2005-22, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9142, University Library of Munich, Germany.

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