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Informational Herding and Optimal Experimentation

Author

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  • Lones Smith

    (Department of Economics, University of Michigan)

  • Peter Norman Sørensen

    (Department of Economics, University of Copenhagen)

Abstract

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.

Suggested Citation

  • Lones Smith & Peter Norman Sørensen, 2005. "Informational Herding and Optimal Experimentation," Discussion Papers 05-13, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:0513
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    References listed on IDEAS

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    1. Philippe Aghion & Patrick Bolton & Christopher Harris & Bruno Jullien, 1991. "Optimal Learning by Experimentation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(4), pages 621-654.
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    13. Burdett, Kenneth, 1996. "Truncated means and variances," Economics Letters, Elsevier, vol. 52(3), pages 263-267, September.
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    Citations

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    Cited by:

    1. Jacob K. Goeree & Thomas R. Palfrey & Brian W. Rogers & Richard D. McKelvey, 2007. "Self-Correcting Information Cascades," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(3), pages 733-762.
    2. Alessandro Lizzeri & Marciano Siniscalchi, 2008. "Parental Guidance and Supervised Learning," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 1161-1195.
    3. 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.
    4. Gleason, Kimberly C. & Mathur, Ike & Peterson, Mark A., 2004. "Analysis of intraday herding behavior among the sector ETFs," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 681-694, December.
    5. Christos Koulovatianos & Leonard J. Mirman & Marc Santugini, 2006. "Investment in a Monopoly with Bayesian Learning," Vienna Economics Papers vie0603, University of Vienna, Department of Economics.
    6. S. Ali & Navin Kartik, 2012. "Herding with collective preferences," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(3), pages 601-626, November.
    7. Christos Koulovatianos & Leonard J. Mirman & Marc Santugini, 2006. "Investment in a Monopoly with Bayesian Learning," Vienna Economics Papers 0603, University of Vienna, Department of Economics.

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    More about this item

    Keywords

    herding; optimal learning; experimentation; contrarianism;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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