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Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades

  • Sushil Bikhchandani
  • David Hirshleifer
  • Ivo Welch

Learning by observing the past decisions of others can help explain some otherwise puzzling phenomena about human behavior. For example, why do people tend to converge on similar behavior? Why is mass behavior prone to error and fads? The authors argue that the theory of observational learning, and particularly of informational cascades, has much to offer economics, business strategy, political science, and the study of criminal behavior.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.12.3.151
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 12 (1998)
Issue (Month): 3 (Summer)
Pages: 151-170

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Handle: RePEc:aea:jecper:v:12:y:1998:i:3:p:151-70
Note: DOI: 10.1257/jep.12.3.151
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  1. Edward E. Glaeser & Bruce Sacerdote & Jose A. Scheinkman, 1995. "Crime and Social Interactions," Harvard Institute of Economic Research Working Papers 1738, Harvard - Institute of Economic Research.
  2. Abhijit Banerjee & Drew Fudenberg, 2010. "Word of Mouth Learning," Levine's Working Paper Archive 723, David K. Levine.
  3. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  4. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
  5. Gilbert, Richard J., 1987. "Investment and Coordination in Oligopolistic Industries," Department of Economics, Working Paper Series qt51b0f7sq, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  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. Timur Kuran, 1989. "Sparks and prairie fires: A theory of unanticipated political revolution," Public Choice, Springer, vol. 61(1), pages 41-74, April.
  8. Smith, L. & Sorensen, P., 1996. "Pathological Outcomes of Observational Learning," Working papers 96-19, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Vives, Xavier, 1993. "How Fast Do Rational Agents Learn?," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 329-47, April.
  10. Caplin, A. & Leahy, J., 1992. "Business as Usual, Market Crashes and Wisdom After the Fact," Discussion Papers 1992_18, Columbia University, Department of Economics.
  11. Khanna, Naveen, 1998. "Optimal Contracting with Moral Hazard and Cascading," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 559-96.
  12. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  13. Kenneth Hendricks & Dan Kovenock, 1989. "Asymmetric Information, Information Externalities, and Efficiency: The Case of Oil Exploration," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 164-182, Summer.
  14. Jay Pil Choi, 1997. "Herd Behavior, the 'Penguin Effect,' and the Suppression of Informational Diffusion: An Analysis of Informational Externalities and Payoff Interdependency," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 407-425, Autumn.
  15. Lisa R. Anderson & Charles A. Holt, 1996. "Classroom Games: Information Cascades," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 187-193, Fall.
  16. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-31, March.
  17. Gul, Faruk & Lundholm, Russell, 1995. "Endogenous Timing and the Clustering of Agents' Decisions," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 1039-66, October.
  18. Jianbo Zhang, 1997. "Strategic Delay and the Onset of Investment Cascades," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 188-205, Spring.
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