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The Stability of Information Cascades: How Herd Behavior Breaks Down

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  • Hans Mewis

Abstract

We extend the standard model of information cascades to situations where agents have to choose between switching to a new alternative or not. In particular, we add two new features to the standard model. First, agents continue to receive signals after they have chosen 'switching'; and second agents may revert their earlier decisions. The focus of the paper is to analyze how information is passed on within an information cascade, and the conditions under which breakdown occurs. We identify rules which describe the learning process and run simulations to estimate the properties of the information cascade. ZUSAMMENFASSUNG - (Zur Stabilität der Informationskaskade: Wann bricht Herdenverhalten ab?) Wir erweitern das Standardmodel der Informationskaskade. Durch die Erweiterung lassen sich Situationen modellieren, die den Individuen die Wahl zwischen einer neuen Alternative und dem bewährten lassen. Die Erweiterung besteht aus zwei Aspekten. Erstens erhalten die Individuen weiterhin Signale, nachdem sie sich für die neue Alternative entschieden haben. Zweitens können sie ihre Entscheidung später wieder zurücknehmen. Wir untersuchen wie sich Information innerhalb der Informationskaskade ausbreitet und unter welchen Bedingungen die Informationskaskade abbricht. Wir beschreiben den Lernprozeß der Individuen und führen eine Simulation des Prozesses durch.

Suggested Citation

  • Hans Mewis, 1998. "The Stability of Information Cascades: How Herd Behavior Breaks Down," CIG Working Papers FS IV 98-14, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    • Handle: RePEc:wzb:wzebiv:fsiv98-14
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    References listed on IDEAS

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    1. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-565, June.
    2. 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.
    3. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
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