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Informational Herding and Optimal Experimentation

Lones Smith and Peter Sørensen

No 05-13, Discussion Papers from University of Copenhagen. Department of Economics

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: herding; optimal learning; experimentation; contrarianism (search for similar items in EconPapers)
JEL-codes: D82 D83 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2005-08
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.econ.ku.dk/english/research/publications/wp/2005/0513.pdf/ (application/pdf)

Related works:
Working Paper: Informational Herding and Optimal Experimentation (2006) Downloads
Working Paper: Informational Herding and Optimal Experientation (1997)
Working Paper: Informational Herding and Optimal Experimentation (1997)
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