Taking the Road Less Traveled by: Does Conversation Eradicate Pernicious Cascades?
H. Henry Cao
University of North Carolina (UNC) at Chapel Hill - Finance Area
University of Texas at Austin - McCombs School of Business
David A. Hirshleifer
University of California, Irvine - Paul Merage School of Business
August 17, 2009
Merage School of Business Working Paper, University of California, Irvine
We offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads, despite communication of the payoff outcomes from past choices. This reflects both direct and indirect action-based information externalities. In contrast with previous cascades literature, cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever. Furthermore, the ability of individuals to communicate can reduce average decision accuracy and welfare.
Number of Pages in PDF File: 28
Keywords: information cascades, herding, conversation, imitation, information externality
JEL Classification: D82, D83, G31, D23, K00working papers series
Date posted: August 22, 2003 ; Last revised: September 16, 2010
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