Informational Herding and Optimal Experimentation

Lones Smith and Peter Norman Sorensen ()
Additional contact information
Lones Smith: Dept. of Economics, University of Michigan
Peter Norman Sorensen: Department of Economics, University of Copenhagen

No 1552, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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.

Keywords: Bayesian learning; value function; herding; experimentation; log concavity; Gittins index; team equilibrium (search for similar items in EconPapers)
JEL-codes: D83 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2006-01
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Informational Herding and Optimal Experimentation (2005)
Working Paper: Informational Herding and Optimal Experientation (1997)
Working Paper: Informational Herding and Optimal Experimentation (1997)
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