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Do We Follow Others When We Should? A Simple Test of Rational Expectations

  • Weizsäcker, Georg

    ()

    (DIW Berlin)

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 significance of suboptimal play. For example, one can ask how much of the possible payoffs 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 confirms that the reluctance to follow others generates a large part of the observed variance in payoffs, adding to the variance that is due to situational differences.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3616.

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Length: 38 pages
Date of creation: Jul 2008
Date of revision:
Publication status: published in: American Economic Review, 2010, 100 (5), 2340-2360
Handle: RePEc:iza:izadps:dp3616
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  1. 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.
  2. Anderson, Lisa R, 2001. "Payoff Effects in Information Cascade Experiments," Economic Inquiry, Western Economic Association International, vol. 39(4), pages 609-15, October.
  3. Dorothea Kübler & Georg Weizs�cker, 2004. "Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 425-441.
  4. Jonathan E. Alevy & Michael S. Haigh & John A. List, 2007. "Information Cascades: Evidence from a Field Experiment with Financial Market Professionals," Journal of Finance, American Finance Association, vol. 62(1), pages 151-180, 02.
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  7. Drehmann, Mathias & Oechssler, Joerg & Roider, Andreas, 2003. "Herding and Contrarian Behavior in Financial Markets: An Internet Experiment," University of California at Santa Barbara, Economics Working Paper Series qt6zf5469f, Department of Economics, UC Santa Barbara.
  8. Goeree, Jacob K. & Holt, Charles A., 2004. "A model of noisy introspection," Games and Economic Behavior, Elsevier, vol. 46(2), pages 365-382, February.
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  12. Jennifer Zelmer, 2003. "Linear Public Goods Experiments: A Meta-Analysis," Experimental Economics, Springer, vol. 6(3), pages 299-310, November.
  13. Jacob K. Goeree & Thomas R. Palfrey & Brian W. Rogers & Richard D. McKelvey, 2007. "Self-Correcting Information Cascades," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 733-762.
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  15. Fahr, René & Irlenbusch, Bernd, 2011. "Who follows the crowd—Groups or individuals?," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 200-209.
  16. 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.
  17. Kraemer, Carlo & Noth, Markus & Weber, Martin, 2006. "Information aggregation with costly information and random ordering: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 423-432, March.
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  21. Anderson, Lisa R & Holt, Charles A, 1997. "Information Cascades in the Laboratory," American Economic Review, American Economic Association, vol. 87(5), pages 847-62, December.
  22. Georg Weizsäcker, 2003. "Ignoring the rationality of others: evidence from experimental normal-form games," LSE Research Online Documents on Economics 507, London School of Economics and Political Science, LSE Library.
  23. Dorothea K¸bler & Georg Weizs”cker, 2004. "Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 425-441, 04.
  24. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
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