Informational Herding and Optimal Experimentation
We show that far from capturing a formally new phenomenon, informational herding is really a special case of single-person experimentation - and `bad herds' the typical failure of complete learning. We then analyze the analogous team equilibrium, where individuals maximize the present discounted welfare of posterity. To do so, we generalize Gittins indices to our non-bandit learning problem, and thereby characterize when contrarian behaviour arises: (i) While herds are still constrained efficient, they arise for a strictly smaller belief set. (ii) A log-concave log-likelihood ratio density robustly ensures that individuals should lean more against their myopic preference for an action the more popular it becomes.
|Date of creation:||Aug 2005|
|Date of revision:|
|Contact details of provider:|| Postal: Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark|
Phone: (+45) 35 32 30 10
Fax: +45 35 32 30 00
Web page: http://www.econ.ku.dk
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Matthew Doyle, 2010.
"Informational externalities, strategic delay, and optimal investment subsidies,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 43(3), pages 941-966, August.
- Doyle, Matthew, 2002. "Informational Externalities, Strategic Delay, and the Search for Optimal Policy," Staff General Research Papers 10046, Iowa State University, Department of Economics.
- Amir, R., .
"Sensitivity analysis of multisector optimal economic dynamics,"
CORE Discussion Papers RP
1192, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Amir, Rabah, 1996. "Sensitivity analysis of multisector optimal economic dynamics," Journal of Mathematical Economics, Elsevier, vol. 25(1), pages 123-141.
- Amir, R., 1991. "Sensitivity analysis of multi-sector optimal economic dynamics," CORE Discussion Papers 1991006, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Vives, X., 1990.
"How Fast Do Rational Agents Learn?,"
UFAE and IAE Working Papers
135-90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- McLennan, Andrew, 1984. "Price dispersion and incomplete learning in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 7(3), pages 331-347, September.
- Lones Smith & Peter Sorensen, 2000.
"Pathological Outcomes of Observational Learning,"
Econometric Society, vol. 68(2), pages 371-398, March.
- Smith, L. & Sorensen, P., 1996. "Pathological Outcomes of Observational Learning," Working papers 96-19, Massachusetts Institute of Technology (MIT), Department of Economics.
- Smith, L. & Sorensen, P., 1996. "Pathological Outcomes of Observational Learning," Economics Papers 115, Economics Group, Nuffield College, University of Oxford.
- Philippe Aghion & Patrick Bolton & Christopher Harris & Bruno Jullien, 1991.
"Optimal Learning by Experimentation,"
Review of Economic Studies,
Oxford University Press, vol. 58(4), pages 621-654.
- Aghion Philippe & Bolton, Patrick & Harris Christopher & Jullien Bruno, 1991. "Optimal learning by experimentation," CEPREMAP Working Papers (Couverture Orange) 9104, CEPREMAP.
- Aghion, P. & Bolton, P. & Harris, C. & Jullien, B., 1990. "Optimal Learning By Experimentation," DELTA Working Papers 90-10, DELTA (Ecole normale supérieure).
- Burdett, Kenneth, 1996. "Truncated means and variances," Economics Letters, Elsevier, vol. 52(3), pages 263-267, September.
- Chamley, Christophe & Gale, Douglas, 1994.
"Information Revelation and Strategic Delay in a Model of Investment,"
Econometric Society, vol. 62(5), pages 1065-85, September.
- Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
- Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
- 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.
- Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
- Sgroi, D., 2000.
"Optimizing Information in the Herd: Guinea Pigs, Profit and Welfare,"
2000-w14, Economics Group, Nuffield College, University of Oxford.
- Sgroi, Daniel, 2002. "Optimizing Information in the Herd: Guinea Pigs, Profits, and Welfare," Games and Economic Behavior, Elsevier, vol. 39(1), pages 137-166, April.
- Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
- James Dow, 1991. "Search Decisions with Limited Memory," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 1-14.
When requesting a correction, please mention this item's handle: RePEc:kud:kuiedp:0513. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Hoffmann)
If references are entirely missing, you can add them using this form.