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A Simple Note on Informational Cascades

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  • Fiore, Annamaria
  • Morone, Andrea

Abstract

Seminal models of herd behaviour and informational cascades point out existence of negative information externalities, and propose to ?destroy? information in order to achieve social improvements. Although in the last years many features of herd behaviour and informational cascades have been studied, this particular aspect has never been extensively analysed. In this article we try to fill this gap, investigating both theoretically and experimentally whether and to which extent destroying information can improve welfare. Our empirical results show that this decisional mechanism actually leads to a behaviour more consistent with the theory that in turn produces the predicted efficiency gain. --

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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2007-21.

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Date of creation: 2007
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Handle: RePEc:zbw:ifwedp:5568

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Keywords: Informational cascades; information externality; individual decision making; experiment;

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References

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  1. Jeffrey M Wooldridge, 2002. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," CeMMAP working papers CWP18/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  2. Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1109-16, October.
  3. Annamaria Fiore & Andrea Morone, 2005. "Is playing alone in the darkness sufficient to prevent informational cascades?," Experimental 0503002, EconWPA.
  4. Abhijit Banerjee & Drew Fudenberg, 2010. "Word of Mouth Learning," Levine's Working Paper Archive 723, David K. Levine.
  5. Andrea Morone & Eleni Samanidou, 2007. "A simple note on Herd Behaviour," series 0013, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Feb 2007.
  6. 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.
  7. Andrea Morone, 2002. "Financial Market in the Laboratory," Computing in Economics and Finance 2002 151, Society for Computational Economics.
  8. John D. Hey & Andrea Morone, 2004. "Do Markets Drive Out Lemmings-or Vice Versa?," Economica, London School of Economics and Political Science, vol. 71(284), pages 637-659, November.
  9. 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.
  10. Selten, Reinhard & Joachim Buchta, 1994. "Experimental Sealed Bid First Price Auctions with Directly Observed Bid Functions," Discussion Paper Serie B 270, University of Bonn, Germany.
  11. John Hey & Louise Allsopp, . "Two Experiments to Test a Model of Herd Behaviour," Discussion Papers 99/24, Department of Economics, University of York.
  12. Pastine, Ivan & Pastine, Tuvana, 2005. "Signal Accuracy and Informational Cascades," CEPR Discussion Papers 5219, C.E.P.R. Discussion Papers.
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Cited by:
  1. Giovanni Ferri & Andrea Morone, 2008. "The Effect of Rating Agencies on Herd Behaviour," EERI Research Paper Series EERI_RP_2008_21, Economics and Econometrics Research Institute (EERI), Brussels.
  2. Andrea Morone & Eleni Samanidou, 2007. "A simple note on Herd Behaviour," series 0013, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Feb 2007.

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