Journal Article

Self-Correcting Information Cascades

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

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 3, pages 733-762
Published in print July 2007 | ISSN: 0034-6527
Published online July 2007 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00438.x
Self-Correcting Information Cascades

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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.

Keywords: D83

Journal Article.  14523 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy

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