Decision Making in Ignorance and Consequent Market Outcomes: Equilibrium Analysis

Partha Gangopadhyay

Modern Applied Science, 2011, vol. 5, issue 3, 3

Abstract: In recent years a series of important work has stressed the importance of iterative planning with market experimentation and learning in markets characterised by uncertain and dynamic environments. The possibility of herding and erroneous social learning can add further instability to unstable markets in which actors suffer from significant knowledge gaps, or from plain ignorance. The main innovation of this paper is to make rational decision-maker aware of the adverse consequences of herding, or informational cascades, in markets characterised by ignorance due to their uncertain and dynamic environments. This paper offers for the first time, to the knowledge of the authors, a simple modelling of a market with uncertain and dynamic environments and explains an equilibrium that is immune from the vagaries of whims, fads and informational cascades. The implication cannot be overstressed- issues of stock-out and markdown losses and market failures can be pushed to the background if the decision-makers home in on this cascade-free equilibrium. In future work, it is imperative to design a mechanism that can act as a succour to this cascade-free equilibrium.

Date: 2011
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