Pastine, Ivan and Pastine, Tuvana
(2005)
Signal Accuracy
and
Informational Cascades : CEPR Discussion Paper No. 5219.
Discussion Paper.
Centre for Economic Policy Research, London.
Abstract
In an observational learning environment, rational agents with incomplete information
may mimic the actions of their predecessors even when their own signal suggests the
opposite. This herding behavior may lead society to an inefficient outcome if the signals
of the early movers happen to be incorrect.
This paper analyzes the effect of signal accuracy on the probability of an
inefficient informational cascade. The literature so far has suggested that an increase in
signal accuracy leads to a decline in the probability of inefficient herding, because the
first movers are more likely to make the correct choice. Indeed, the results in
Bikhchandani, Hirshleifer and Welch (1992) support this proposition. Here we show that
this is not the case in general. We present simulations which demonstrate that even a
small departure from symmetry in signal accuracy may lead to non-monotonic results. An
increase in signal accuracy may result in a higher likelihood of an inefficient cascade.
| Item Type: |
Monograph
(Discussion Paper)
|
| Keywords: |
Signal Accuracy; Informational Cascades; herding behavior; |
| Academic Unit: |
Faculty of Social Sciences > Economics, Finance and Accounting |
| Item ID: |
5039 |
| Depositing User: |
Tuvana Pastine
|
| Date Deposited: |
23 Jun 2014 15:44 |
| Publisher: |
Centre for Economic Policy Research |
| URI: |
|
| Use Licence: |
This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available
here |
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