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Title: Rational and Naive Herding

Author(s): Erik Eyster and Matthew Rabin

Publication Date: July 2009

Keyword(s): Cursed equiliibrium, Herding, Naive inference and Social Learning

Programme Area(s): Public Economics

Abstract: In social-learning environments, we investigate implications of the assumption that people naively believe that each previous person's action reflects solely that person's private information, leading them to systematically imitate all predecessors even in the many circumstances where rational agents do not. Naive herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. They herd with positive probability on incorrect actions across a broad array of rich-information settings where rational players never do, and---because they become fully confident even when wrong---can be harmed on average by observing others.

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Bibliographic Reference

Eyster, E and Rabin, M. 2009. 'Rational and Naive Herding'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7351