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Simple Model Of Herd Behaviour, A Comment

Listed author(s):
  • Andrea Morone

In his ‘Simple model of herd behaviour’, Banerjee (1992) shows that – in a sequential game – if the first two players have chosen the same action, all subsequent players will ignore their own information and start a herd, an irreversible one. The points of strength of Banerjee’s model are its simplicity and the robustness of its results. Its weakness is that it is based on three tie-breaking assumptions, which according to Banerjee minimise herding probabilities. In this paper we analyse the role played by the tie-breaking assumptions in reaching the equilibrium. Even if the overall probability of herding does not change dramatically, the results obtained, which differ from Banerjee's are the following: players' strategies are parameter dependent; an incorrect herd could be reversed; a correct herd is irreversible. There are, in addition, some several cases where available information allows players to find out which action is correct, and so an irreversible correct herd starts.

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Paper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2008_12.

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Length: 10 pages
Date of creation: 22 Oct 2008
Handle: RePEc:eei:rpaper:eeri_rp_2008_12
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