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Does Cascade Behavior Reflect Bayesian Updating? –An Experimental Study--

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  • Clemens Oberhammer
  • Andreas Stiehler

Abstract

We examine the explanatory power of cascade models by implementing the BDM-mechanism in a simple cascade experiment in which subject have to decide on the prediction of a randomly chosen urn. Assigned price limits to participate in the prediction game are used as indicators of subjective probabilities. We are thus able to test the explanatory power of the standard BHW model (Bickchandani, Hirshleifer and Welch, 1992) in comparison to cascade models which incorporate individual decision errors. Focusing on stated price limits corresponding to urn predictions in line with both, standard and error BHW models our data indicate that the inclusion of errors does not significantly improve the explanatory power of the standard approach.

Suggested Citation

  • Clemens Oberhammer & Andreas Stiehler, "undated". "Does Cascade Behavior Reflect Bayesian Updating? –An Experimental Study--," Papers on Strategic Interaction 2003-01, Max Planck Institute of Economics, Strategic Interaction Group.
  • Handle: RePEc:esi:discus:2003-01
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    File URL: ftp://papers.econ.mpg.de/esi/discussionpapers/2003-01.pdf
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    References listed on IDEAS

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    1. Anderson, Lisa R. & Holt, Charles A., 2008. "Information Cascade Experiments," Handbook of Experimental Economics Results, Elsevier.
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    Cited by:

    1. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2005. "Herding and Contrarian Behavior in Financial Markets: An Internet Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1403-1426, December.
    2. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2005. "Herding and Contrarian Behavior in Financial Markets: An Internet Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1403-1426, December.

    More about this item

    Keywords

    information cascades; Bayes' rule; decisions under risk and uncertainty; BDM; experimental economics;

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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