DP7351 Rational and Naive Herding
|Author(s):||Erik Eyster, Matthew Rabin|
|Publication Date:||July 2009|
|Keyword(s):||Cursed equiliibrium, Herding, Naive inference, Social Learning|
|Programme Areas:||Public Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=7351|
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.