Rational and Naive Herding

Erik Eyster and Matthew Rabin

No 7351, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Cursed equiliibrium; Herding; Naive inference; Social Learning (search for similar items in EconPapers)
JEL-codes: B49 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta
Date: 2009-07

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