Chapter

Herding and Informational Cascades

Markus K. Brunnermeier

in Asset Pricing under Asymmetric Information

Published in print January 2001 | ISBN: 9780198296980
Published online November 2003 | e-ISBN: 9780191596025 | DOI: http://dx.doi.org/10.1093/0198296983.003.0005
Herding and Informational Cascades

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Classifies different herding models. Rational herding in sequential decision‐making is either due to payoff externalities or information externalities. In herding models with reputational effects in a principal‐agent setting both types of externalities are present. Herding due to information externalities may arise in settings where the predecessor's action is a strong enough signal such that the agent disregards his own signal. Informational cascades might emerge if the predecessor's action is only a noisy signal of his information. We distinguish between exogenous sequencing where the order of moves is pre‐specified, and endogenous sequencing where the decision makers decide when to move.

Keywords: endogenous sequencing; exogenous sequencing; information cascades; informational externalities; reputation

Chapter.  7570 words. 

Subjects: Financial Markets

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