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The Emergence of Fads in a Changing World

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  • Wanying Huang

Abstract

We study how fads emerge under social learning in a changing environment. We consider a simple sequential social learning model where rational agents arrive in order, each acting only once, and the underlying unknown state constantly evolves. Each agent receives a private signal, observes all past actions of others, and chooses an action to match the current state. Because the state changes over time, cascades cannot last forever, and actions also fluctuate. We show that despite the rise of temporary information cascades, in the long run, actions change more often than the state. This result provides a theoretical foundation for faddish behavior in which people often change their actions more frequently than necessary.

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  • Wanying Huang, 2022. "The Emergence of Fads in a Changing World," Papers 2208.14570, arXiv.org, revised Nov 2024.
    • Handle: RePEc:arx:papers:2208.14570
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    References listed on IDEAS

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    1. David Hirshleifer & Ivo Welch, 2002. "An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(3), pages 379-421, September.
    2. Camerer, Colin, 1989. "Bubbles and Fads in Asset Prices," Journal of Economic Surveys, Wiley Blackwell, vol. 3(1), pages 3-41.
    3. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    4. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
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