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Do We Follow Private Information when We Should? Laboratory Evidence on Nave Herding

  • Christoph March


    (Paris School of Economics)

  • Sebastian Krügel


    (Max Planck Institute of Economics, IMPRS "Uncertainty", Jena)

  • Anthony Ziegelmeyer


    (Max Planck Institute of Economics, Strategic Interaction Group)

We investigate whether experimental participants follow their private information and contradict herds in situations where it is empirically optimal to do so. We consider two sequences of players, an observed and an unobserved sequence. Observed players sequentially predict which of two options has been randomly chosen with the help of a medium quality private signal. Unobserved players predict which of the two options has been randomly chosen knowing previous choices of observed and with the help of a low, medium or high quality signal. We use preprogrammed computers as observed players in half the experimental sessions. Our new evidence suggests that participants are prone to a 'social-confirmation' bias and it gives support to the argument that they naiively believe that each observable choice reveals a substantial amount of that person's private information. Though both the 'overweighting-of-private-information' and the 'social-confirmation' bias coexist in our data, participants forgo much larger parts of earnings when herding naively than when relying too much on their private information. Unobserved participants make the empirically optimal choice in 77 and 84 percent of the cases in the human-human and computer-human treatment which suggests that social learning improves in the presence of lower behavioral uncertainty.

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Paper provided by Friedrich-Schiller-University Jena in its series Jena Economic Research Papers with number 2012-002.

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Date of creation: 02 Feb 2012
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Handle: RePEc:jrp:jrpwrp:2012-002
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  1. Anthony Ziegelmeyer & Frédéric Koessler & Juergen Bracht & Eyal Winter, 2010. "Fragility of information cascades: an experimental study using elicited beliefs," Experimental Economics, Springer;Economic Science Association, vol. 13(2), pages 121-145, June.
  2. Richard Mckelvey & Thomas Palfrey, 1998. "Quantal Response Equilibria for Extensive Form Games," Experimental Economics, Springer;Economic Science Association, vol. 1(1), pages 9-41, June.
  3. 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.
  4. Weizsäcker, Georg, 2008. "Do We Follow Others When We Should? A Simple Test of Rational Expectations," IZA Discussion Papers 3616, Institute for the Study of Labor (IZA).
  5. Anthony Ziegelmeyer & Christoph March & Sebastian Kr?gel, 2013. "Do We Follow Others When We Should? A Simple Test of Rational Expectations: Comment," American Economic Review, American Economic Association, vol. 103(6), pages 2633-42, October.
  6. Marco Cipriani & Antonio Guarino, 2009. "Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 206-233, 03.
  7. Christoph March, 2016. "Adaptive Social Learning," CESifo Working Paper Series 5783, CESifo Group Munich.
  8. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  9. Andrew Chesher, 2008. "Instrumental variable models for discrete outcomes," CeMMAP working papers CWP30/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  10. R. McKelvey & T. Palfrey, 2010. "Quantal Response Equilibria for Normal Form Games," Levine's Working Paper Archive 510, David K. Levine.
  11. Adeline Delavande, 2008. "Measuring revisions to subjective expectations," Journal of Risk and Uncertainty, Springer, vol. 36(1), pages 43-82, February.
  12. 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.
  13. Christoph March & Anthony Ziegelmeyer, 2009. "Behavioral Social Learning," Jena Economic Research Papers 2009-105, Friedrich-Schiller-University Jena.
  14. Christoph March, 2011. "Adaptive social learning," Working Papers halshs-00572528, HAL.
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