Naïve Herding in Rich-Information Settings

Erik Eyster and Matthew Rabin

American Economic Journal: Microeconomics, 2010, vol. 2, issue 4, 221-43

Abstract: In social-learning environments, we investigate implications of the assumption that people naïvely believe that each previous person's action reflects solely that person's private information. Naïve herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. Such "social confirmation bias" leads them to herd with positive probability on incorrect actions even in extremely rich-information settings where rational players never do. Moreover, because they become fully confident even when wrong, naïve herders can be harmed, on average, by observing others. (JEL D82, D83)

JEL-codes: D82 D83 (search for similar items in EconPapers)
Date: 2010
Note: DOI: 10.1257/mic.2.4.221
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Citations: View citations in EconPapers (62)

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