Self-Correcting Information Cascades

Jacob Goeree, Thomas Palfrey, Brian Rogers and Richard D. McKelvey

The Review of Economic Studies, 2007, vol. 74, issue 3, 733-762

Abstract: We report experimental results from long sequences of decisions in environments that are theoretically prone to severe information cascades. Observed behaviour is much different—information cascades are ephemeral. We study the implications of a theoretical model based on quantal response equilibrium, in which the observed cascade formation/collapse/formation cycles arise as equilibrium phenomena. Consecutive cascades may reverse states, and usually such a reversal is self-correcting: the cascade switches to the correct state. These implications are supported by the data. We extend the model to allow for base rate neglect and find strong evidence for overweighting of private information. The estimated belief trajectories indicate fast and efficient learning dynamics. Copyright 2007, Wiley-Blackwell.

Date: 2007
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Related works:
Working Paper: Self-Correcting Information Cascades (2006)
Working Paper: Self-Correcting Information Cascades (2004)
Working Paper: Self-correcting Information Cascades (2004)
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