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Pathological Outcomes of Observational Learning

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  • Lones Smith
  • Peter Sorensen

Abstract

This paper explores how Bayes-rational individuals learn sequentially from the discrete actions of others. Unlike earlier informational herding papers, we admit heterogeneous preferences. Not only may type-specific "herds" eventually arise, but a new robust possibility emerges: "confounded learning". Beliefs may converge to a limit point where history offers no decisive lessons for anyone, and each type's actions forever nontrivially split between two actions. To verify that our identified limit outcomes do arise, we exploit the Markov-martingale character of beliefs. Learning dynamics are stochastically stable near a fixed point in many Bayesian learning models like this one.

Suggested Citation

  • Lones Smith & Peter Sorensen, 2000. "Pathological Outcomes of Observational Learning," Econometrica, Econometric Society, vol. 68(2), pages 371-398, March.
    • Handle: RePEc:ecm:emetrp:v:68:y:2000:i:2:p:371-398
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    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other

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