Observational learning occurs when privately informed individuals sequentially choose among finitely many actions after seeing predecessorsâ€™ choices. We summarise the general theory of this paradigm: belief convergence forces action convergence; specifically, copycat â€˜herdsâ€™ arise. Also, beliefs converge to a point mass on the truth exactly when the private information is not uniformly bounded.This subsumes two key findings of the original herding literature: With multinomial signals, cascades occur, where individuals rationally ignore their private signals, and incorrect herds start with positive probability. The framework is flexible â€“ some individuals may be committed to an action, or individuals may have divergent cardinal or even ordinal preferences.
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|This chapter was published in: Steven N. Durlauf & Lawrence E. Blume (ed.) , , pages , 2011, 4th quarter update.|
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