Self-Correcting Information Cascades

In laboratory experiments, information cascades are ephemeral phenomena, collapsing soon after they form, and them reforming again. The formation/collapse/reformation cycles occur frequently and repeatedly. Cascades may be reversed (collapse followed by a cascade on a different state) and more often than not, such a reversal is self-correcting: The cascade switches from the incorrect to the correct state. Past experimental work focused on relatively short horizons, where these interesting dynamics are rarely observed. We present experiments with a longer horizon, and also investigate the effect of signal informativeness. We propose a theoretical model, based on quantal response equilibrium, where temporary and self-correcting cascades arise as equilibrium phenomena. The model also predicts the systematic differences we observe experimentally in the dynamics, as a function of signal informativeness. We extend the basic model to include a parameter measuring base rate neglect and find it to be a statistically significant factor in the dynamics, resulting in somewhat faster rates of social learning. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this (This abstract was borrowed from another version of this item.)

[1]  Marco Cipriani,et al.  Herd Behavior in a Laboratory Financial Market , 2005 .

[2]  Jeff Dominitz,et al.  Homogeneous Actions and Hetergeneous Beliefs: Experimental Evidence on the Formation of Information Cascades , 2004 .

[3]  Mathias Drehmann,et al.  Herding and Contrarian Behavior in Financial Markets: An Internet Experiment , 2005 .

[4]  Joerg Oechssler,et al.  Informational cascades in the laboratory: Do they occur for the right reasons? , 2000 .

[5]  Jacob K. Goeree,et al.  Social learning with private and common values , 2006 .

[6]  A. Tversky,et al.  The weighing of evidence and the determinants of confidence , 1992, Cognitive Psychology.

[7]  Charles A. Holt,et al.  Regular Quantal Response Equilibrium , 2005 .

[8]  Lisa R. Anderson.  Payoff Effects in Information Cascade Experiments , 2001 .

[9]  Shachar Kariv,et al.  Distinguishing Informational Cascades from Herd Behavior in the Laboratory , 2004 .

[10]  Jacob K. Goeree,et al.  Quantal Response Equilibrium and Overbidding in First Price Auctions , 2002 .

[11]  S. Bikhchandani,et al.  You have printed the following article : A Theory of Fads , Fashion , Custom , and Cultural Change as Informational Cascades , 2007 .

[12]  D. Stahl,et al.  On Players' Models of Other Players: Theory and Experimental Evidence , 1995 .

[13]  Lones Smith,et al.  Informational Herding and Optimal Experimentation , 2006 .

[14]  C. Plott,et al.  Information Cascades: Replication and an Extension to Majority Rule and Conformity-Rewarding Institutions , 2001 .

[15]  A. Tversky,et al.  On the psychology of prediction , 1973 .

[16]  Dorothea Kübler,et al.  Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory , 2001 .

[17]  Shachar Kariv,et al.  Observational learning under imperfect information , 2004, Games Econ. Behav..

[18]  Colin Camerer,et al.  A Cognitive Hierarchy Model of Games , 2004 .

[19]  Martin Weber,et al.  Information Aggregation with Random Ordering: Cascades and Overconfidence , 2003 .

[20]  Charles A. Holt,et al.  Information Cascades in the Laboratory , 1998 .

[21]  I. Welch,et al.  On the Evolution of Overconfidence and Entrepreneurs , 2001 .

[22]  Douglas Gale,et al.  What have we learned from social learning , 1996 .

[23]  Clemens Oberhammer,et al.  Does Cascade Behavior Reflect Bayesian Updating? An Experimental Study-- , 2003 .

[24]  Syngjoo Choi,et al.  A Theory and Experiments of Learning in Social Networks , 2004 .

[25]  Georg Weizsäcker.  Ignoring the Rationality of Others: Evidence from Experimental Normal-form Games , 2001 .

[26]  Colin Camerer.  Individual Decision Making , 2020, The Handbook of Experimental Economics.

[27]  A. Schotter,et al.  Words Speak Louder than Actions and Improve Welfare: An Experimental Test of Advice and Social Learning , 2005 .

[28]  R. McKelvey,et al.  Quantal Response Equilibria for Extensive Form Games , 1998 .

[29]  A. Banerjee,et al.  A Simple Model of Herd Behavior , 1992 .

[30]  Ward Edwards,et al.  Judgment under uncertainty: Conservatism in human information processing , 1982 .

[31]  R. McKelvey,et al.  Quantal Response Equilibria for Normal Form Games , 1995 .

[32]  Lones Smith,et al.  Pathological Outcomes of Observational Learning , 2000 .

[33]  Dorothea Kübler,et al.  Are Longer Cascades More Stable? , 2004 .