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Do we follow others when we should? A simple test of rational expectations

  • Georg Weizsacker

The paper presents a new meta data set covering 13 experiments on the social learning games by Bikhchandani, Hirshleifer, and Welch (1992). The large amount of data makes it possible to estimate the empirically optimal action for a large variety of decision situations and ask about the economic signi…cance of suboptimal play. For example, one can ask how much of the possible payo¤s the players earn in situations where it is empirically optimal that they follow others and contradict their own information. The answer is 53% on average across all experiments –only slightly more than what they would earn by choosing at random. The players’ own information carries much more weight in the choices than the information conveyed by other players’choices: the average player contradicts her own signal only if the empirical odds ratio of the own signal being wrong, conditional on all available information, is larger than 2:1, rather than 1:1 as would be implied by rational expectations. A regression analysis formulates a straightforward test of rational expectations, which rejects, and con…rms that the reluctance to follow others generates a large part of the observed variance in payo¤s, adding to the variance that is due to situational di¤erences.

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File URL: http://eprints.lse.ac.uk/4945/
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 4945.

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Length: 37 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:ehl:lserod:4945
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  12. Jacob K. Goeree & Charles A. Holt, 2000. "A Model of Noisy Introspection," Virginia Economics Online Papers 343, University of Virginia, Department of Economics.
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  16. Angela A. Hung & Charles R. Plott, 2001. "Information Cascades: Replication and an Extension to Majority Rule and Conformity-Rewarding Institutions," American Economic Review, American Economic Association, vol. 91(5), pages 1508-1520, December.
  17. Dominitz, Jeff & Hung, Angela A., 2009. "Empirical models of discrete choice and belief updating in observational learning experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 69(2), pages 94-109, February.
  18. Anderson, Lisa R, 2001. "Payoff Effects in Information Cascade Experiments," Economic Inquiry, Western Economic Association International, vol. 39(4), pages 609-15, October.
  19. Fahr, René & Irlenbusch, Bernd, 2011. "Who follows the crowd—Groups or individuals?," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 200-209.
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  23. Steffen Huck & Hans-Theo Normann & Jörg Oechssler, 2001. "Two are Few and Four are Many: Number Effects in Experimental Oligopolies," Bonn Econ Discussion Papers bgse12_2001, University of Bonn, Germany.
  24. Guarino, Antonio & Harmgart, Heike & Huck, Steffen, 2011. "Aggregate information cascades," Games and Economic Behavior, Elsevier, vol. 73(1), pages 167-185, September.
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  26. Dorothea Kübler & Georg Weizsäcker, 2005. "Are Longer Cascades More Stable?," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 330-339, 04/05.
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