Herd behavior and the quality of opinions

This paper analyzes a decentralized decision model by adding some inertia in the social leaning process. Before making a decision, an agent can observe the group opinion in a society. Social learning can result in a variety of equilibrium behavioral patterns. For insufficient ranges of quality (precision) of opinions, the chosen stationary state is unique and globally accessible, in which all agents adopt the superior action. Sufficient quality of opinions gives rise to multiple stationary states. One of them will be characterized by inefficient herding. The confidence in the majority opinion then has serious welfare consequences.

[1]  U. Dholakia,et al.  Coveted or Overlooked? The Psychology of Bidding for Comparable Listings in Digital Auctions , 2001 .

[2]  Alan Kirman,et al.  Ants, Rationality, and Recruitment , 1993 .

[3]  Kiminori Matsuyama,et al.  The market size, entrepreneurship, and the big push , 1992 .

[4]  P. David.  Clio and the Economics of QWERTY , 1985 .

[5]  George A. Akerlof.  A theory of social custom, of which unemployment may be one consequence , 1980 .

[6]  G. Becker,et al.  A Note on Restaurant Pricing and Other Examples of Social Influences on Price , 1991, Journal of Political Economy.

[7]  Douglas Gale,et al.  Information Revelation and Strategic Delay in a Model of Investment , 1994 .

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

[9]  André Orléan.  Bayesian interactions and collective dynamics of opinion: Herd behavior and mimetic contagion , 1995 .

[10]  Edi Karni,et al.  FIXED PREFERENCES AND CHANGING TASTES , 1990 .

[11]  A. Banerjee,et al.  The Economics of Rumours , 1993 .

[12]  D. Friedman.  EVOLUTIONARY GAMES IN ECONOMICS , 1991 .

[13]  D. North.  Competing Technologies , Increasing Returns , and Lock-In by Historical Events , 1994 .

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

[15]  A. Tversky,et al.  Choice in Context: Tradeoff Contrast and Extremeness Aversion , 1992 .

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

[17]  Andrew John,et al.  Coordinating Coordination Failures in Keynesian Models , 1988 .

[18]  I. Gilboa,et al.  Social Stability and Equilibrium , 1991 .

[19]  Arthur De Vany,et al.  The Emergence and Evolution of Self-Organized Coalitions , 1996 .

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

[21]  H. Leibenstein.  Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand , 1950 .

[22]  Andrei Shleifer,et al.  Industrialization and the Big Push , 1988, Journal of Political Economy.