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observational learning

  • Lones Smith
  • Peter Norman Sørensen

Observational learning occurs when privately informed individuals sequentially choose among finitely many actions after seeing predecessors’ choices. We summarise the general theory of this paradigm: belief convergence forces action convergence; specifically, copycat ‘herds’ 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 – 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.
This item is provided by Palgrave Macmillan in its series The New Palgrave Dictionary of Economics with number v:5:year:2011:doi:3870.
Handle: RePEc:pal:dofeco:v:5:year:2011:doi:3870
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