A Simple Model of Herd Behavior
The author analyzes a sequential decision model in which each decisionmaker looks at the decisions made by previous decisionmakers in taking her own decision. This is rational for her because these other decisionmakers may have some information that is important for her. The author then shows that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. The author then shows that the resulting equilibrium is inefficient. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Volume (Year): 107 (1992)
Issue (Month): 3 (August)
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