The wisdom of the minority
We consider a simple variant of the canonical model of social learning and show that in many situations it is optimal for an agent to abandon her own information and follow the minority rather than the majority. This possibility depends on two economically meaningful requirements: agents are differentially informed and observe only the number of agents having chosen each option, such as consumers observing only market shares. We show that minority wisdom arises when information is sufficiently heterogeneous and the well informed are not overly abundant, yet the conditions necessary are not overly restrictive. In fact, it is possible for the minority to be wise even when the minority consists of a lone dissenter and a majority of citizens are well informed.
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Levine's Working Paper Archive
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