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Herding with costly information and signal extraction

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  • Yang, Wan-Ru

Abstract

Costly signal acquisition compels decision-makers to choose between acquiring private signals and following their predecessors, which can result in problems associated with signal extraction. The results show that the information externality of the second decision-maker influences the efficiency of herd behavior among subsequent decision-makers. If the second decision-maker acts differently than his predecessor, the followers take a free ride on his signal acquisition and act correctly. However, if the second investor acts in the same manner as his predecessor, the followers will acquire the costly signals only if the precision of their private signals is significant, otherwise herding is inefficient.

Suggested Citation

  • Yang, Wan-Ru, 2011. "Herding with costly information and signal extraction," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 624-632, October.
  • Handle: RePEc:eee:reveco:v:20:y:2011:i:4:p:624-632
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    References listed on IDEAS

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    1. Dorothea Kübler & Georg Weizsäcker, 2003. "Information Cascades in the Labor Market," Journal of Economics, Springer, vol. 80(3), pages 211-229, November.
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    Cited by:

    1. Yoon, Young-Ro, 2015. "Strategic behavior in acquiring and revealing costly private information," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 133-148.
    2. Yao, Juan & Ma, Chuanchan & He, William Peng, 2014. "Investor herding behaviour of Chinese stock market," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 12-29.
    3. Chang, Chih-Hsiang & Lin, Shih-Jia, 2015. "The effects of national culture and behavioral pitfalls on investors' decision-making: Herding behavior in international stock markets," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 380-392.

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