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Naïve Herding in Rich-Information Settings

Author

Listed:
  • Erik Eyster
  • Matthew Rabin

Abstract

In social-learning environments, we investigate implications of the assumption that people naïvely believe that each previous person's action reflects solely that person's private information. Naïve herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. Such "social confirmation bias" leads them to herd with positive probability on incorrect actions even in extremely rich-information settings where rational players never do. Moreover, because they become fully confident even when wrong, naïve herders can be harmed, on average, by observing others. (JEL D82, D83)

Suggested Citation

  • Erik Eyster & Matthew Rabin, 2010. "Naïve Herding in Rich-Information Settings," American Economic Journal: Microeconomics, American Economic Association, vol. 2(4), pages 221-243, November.
  • Handle: RePEc:aea:aejmic:v:2:y:2010:i:4:p:221-43 Note: DOI: 10.1257/mic.2.4.221
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    References listed on IDEAS

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    1. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, pages 81-104.
    2. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927, December.
    3. Antonio Guarino & Philippe Jehiel, 2013. "Social Learning with Coarse Inference," American Economic Journal: Microeconomics, American Economic Association, pages 147-174.
    4. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, pages 724-748.
    5. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, pages 1313-1326.
    6. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019, December.
    7. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
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    Citations

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    Cited by:

    1. Fabrizio Germano & Francesco Sobbrio, 2016. "Opinion dynamics via search engines (and other algorithmic gatekeepers)," Economics Working Papers 1552, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2017.
    2. Nicolas Astier, 2016. "Comparative Feedbacks under Incomplete Information," Working Papers hal-01465189, HAL.
    3. Jaqueson K. Galimberti & Nicolas Suhadolnik & Sergio Silva, 2017. "Cowboying Stock Market Herds with Robot Traders," Computational Economics, Springer;Society for Computational Economics, vol. 50(3), pages 393-423, October.
    4. Levy, Gilat & Razin, Ronny, 2017. "The coevolution of segregation, polarized beliefs and discrimination: the case of private versus state education," LSE Research Online Documents on Economics 68532, London School of Economics and Political Science, LSE Library.
    5. Bohren, J. Aislinn, 2016. "Informational herding with model misspecification," Journal of Economic Theory, Elsevier, vol. 163(C), pages 222-247.
    6. Christopher Boortz, 2016. "Irrational Exuberance and Herding in Financial Markets," SFB 649 Discussion Papers SFB649DP2016-016, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    7. repec:eee:eecrev:v:94:y:2017:i:c:p:148-165 is not listed on IDEAS
    8. Victor Chernozhukov & Iv'an Fern'andez-Val & Whitney Newey, 2017. "Nonseparable Multinomial Choice Models in Cross-Section and Panel Data," Papers 1706.08418, arXiv.org.
    9. Jonathan Zinman, 2014. "Consumer Credit: Too Much or Too Little (or Just Right)?," The Journal of Legal Studies, University of Chicago Press, pages 209-237.
    10. repec:eee:jfinec:v:126:y:2017:i:1:p:147-170 is not listed on IDEAS
    11. Antony Millner & Hélène Ollivier, 2016. "Beliefs, Politics, and Environmental Policy," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(2), pages 226-244.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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