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Self-Correcting Information Cascades

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

We report experimental results from long sequences of decisions in environments that are theoretically prone to severe information cascades. Observed behaviour is much different—information cascades are ephemeral. We study the implications of a theoretical model based on quantal response equilibrium, in which the observed cascade formation/collapse/formation cycles arise as equilibrium phenomena. Consecutive cascades may reverse states, and usually such a reversal is self-correcting: the cascade switches to the correct state. These implications are supported by the data. We extend the model to allow for base rate neglect and find strong evidence for overweighting of private information. The estimated belief trajectories indicate fast and efficient learning dynamics. Copyright 2007, Wiley-Blackwell.

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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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