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When half the truth is better than the truth: A Theory of aggregate information cascades


  • Antonio Guarino

    (University College London)

  • Steffen Huck

    (University College London)

  • Heike Harmgart

    (European Bank for Reconstruction and Development(EBRD))


We introduce a new model of aggregate information cascades where only one of two possible actions is observable to others. When called upon, agents (who decide in some random order that they do not know) are only informed about the total number of others who have chosen the observable action before them. This informational structure arises nat- urally in many applications. Our most important result is that only one type of cascade arises in equilibrium, the aggregate cascade on the observable action. A cascade on the unobservable action never arises. Our results may have important policy consequences. Central agencies, for example in the health sector, may optimally decide to withhold in- formation from the public.

Suggested Citation

  • Antonio Guarino & Steffen Huck & Heike Harmgart, 2008. "When half the truth is better than the truth: A Theory of aggregate information cascades," WEF Working Papers 0046, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  • Handle: RePEc:wef:wpaper:0046

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    References listed on IDEAS

    1. 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.
    2. Banerjee, Abhijit & Fudenberg, Drew, 2004. "Word-of-mouth learning," Games and Economic Behavior, Elsevier, vol. 46(1), pages 1-22, January.
    3. Dorothea Kübler & Georg Weizsäcker, 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. Xavier Vives, 2007. "Information and Learning in Markets," Levine's Bibliography 122247000000001520, UCLA Department of Economics.
    5. 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.
    6. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927, March.
    7. Huck, Steffen & Oechssler, Jorg, 2000. "Informational cascades in the laboratory: Do they occur for the right reasons?," Journal of Economic Psychology, Elsevier, vol. 21(6), pages 661-671, December.
    8. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
    9. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019, March.
    10. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
    11. 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.
    12. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, vol. 62(2), pages 629-668, April.
    13. Guarino, Antonio & Harmgart, Heike & Huck, Steffen, 2011. "Aggregate information cascades," Games and Economic Behavior, Elsevier, vol. 73(1), pages 167-185, September.
    14. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
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    Cited by:

    1. Antonio Guarino & Philippe Jehiel, 2013. "Social Learning with Coarse Inference," American Economic Journal: Microeconomics, American Economic Association, vol. 5(1), pages 147-174, February.
    2. Antonio Guarino & Antonella Ianni, 2010. "Bayesian Social Learning with Local Interactions," Games, MDPI, Open Access Journal, vol. 1(4), pages 1-21, October.
    3. Antonio Guarino & Philippe Jehiel, 2009. "Social Leanring with Course Inference," WEF Working Papers 0050, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.

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