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Taking the road less traveled by: Does conversation eradicate pernicious cascades?

  • Cao, H. Henry
  • Han, Bing
  • Hirshleifer, David

We offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads, despite communication of the payoff outcomes from past choices. This reflects both direct and indirect action-based information externalities. In contrast with previous cascades literature, cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever. Furthermore, the ability of individuals to communicate can reduce average decision accuracy and welfare.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 146 (2011)
Issue (Month): 4 (July)
Pages: 1418-1436

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Handle: RePEc:eee:jetheo:v:146:y:2011:i:4:p:1418-1436
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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