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Self-Correcting Information Cascades

  • Jacob K. Goeree
  • Thomas R. Palfrey
  • Brian W. Rogers
  • Richard D. McKelvey

In laboratory experiments, information cascades are ephemeral phenomena, collapsing soon after they form, and them reforming again. The formation/collapse/reformation cycles occur frequently and repeatedly. Cascades may be reversed (collapse followed by a cascade on a different state) and more often than not, such a reversal is self-correcting: The cascade switches from the incorrect to the correct state. Past experimental work focused on relatively short horizons, where these interesting dynamics are rarely observed. We present experiments with a longer horizon, and also investigate the effect of signal informativeness. We propose a theoretical model, based on quantal response equilibrium, where temporary and self-correcting cascades arise as equilibrium phenomena. The model also predicts the systematic differences we observe experimentally in the dynamics, as a function of signal informativeness. We extend the basic model to include a parameter measuring base rate neglect and find it to be a statistically significant factor in the dynamics, resulting in somewhat faster rates of social learning.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 321307000000000211.

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Date of creation: 15 Jul 2006
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Handle: RePEc:cla:levrem:321307000000000211
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  25. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
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  29. Markus Noth & Martin Weber, 2003. "Information Aggregation with Random Ordering: Cascades and Overconfidence," Economic Journal, Royal Economic Society, vol. 113(484), pages 166-189, January.
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