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Social Learning with Coarse Inference

  • Antonio Guarino
  • Philippe Jehiel

We study social learning by boundedly rational agents. Agents take a decision in sequence, after observing their predecessors and a private signal. They are unable to make perfect inferences from their predecessors' decisions: they only understand the relation between the aggregate distribution of actions and the state of nature, and make their inferences accordingly. We show that, in a discrete action space, even if agents receive signals of unbounded precision, there are asymptotic inefficiencies. In a continuous action space, compared to the rational case, agents overweight early signals. Despite this behavioral bias, eventually agents learn the realized state of the world and choose the correct action. (JEL D82, D83)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mic.5.1.147
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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 5 (2013)
Issue (Month): 1 (February)
Pages: 147-74

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Handle: RePEc:aea:aejmic:v:5:y:2013:i:1:p:147-74
Note: DOI: 10.1257/mic.5.1.147
Contact details of provider: Web page: https://www.aeaweb.org/aej-micro
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  1. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
  2. Ellison, Glenn & Fudenberg, Drew, 1993. "Rules of Thumb for Social Learning," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 612-43, August.
  3. Monzón, Ignacio & Rapp, Michael, 2014. "Observational learning with position uncertainty," Journal of Economic Theory, Elsevier, vol. 154(C), pages 375-402.
  4. Weizsäcker, Georg, 2008. "Do We Follow Others When We Should? A Simple Test of Rational Expectations," IZA Discussion Papers 3616, Institute for the Study of Labor (IZA).
  5. Antonio Guarino & Steffen Huck & Heike Harmgart, 2008. "When half the truth is better than the truth: A Theory of aggregate information cascades," WEF Working Papers 0046, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  6. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
  7. Larson, Nathan, 2008. "Inertia in social learning from a summary statistic," MPRA Paper 32143, University Library of Munich, Germany, revised Jul 2011.
  8. Philippe Jehiel, 2005. "Analogy-Based Expectation Equilibrium," Levine's Bibliography 784828000000000106, UCLA Department of Economics.
  9. Zwiebel, Jeffrey H. & Vayanos, Dimitri & DeMarzo, Peter M., 2001. "Persuasion Bias, Social Influence, and Uni-Dimensional Opinions," Research Papers 1719, Stanford University, Graduate School of Business.
  10. Abhijit Banerjee & Drew Fudenberg, 2010. "Word of Mouth Learning," Levine's Working Paper Archive 723, David K. Levine.
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  12. Huck, Steffen & Oechssler, Jorg, 1998. "Informational cascades with continuous action spaces," Economics Letters, Elsevier, vol. 60(2), pages 163-166, August.
  13. 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.
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  16. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
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