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Taking the Road Less Traveled by: Does Conversation Eradicate Pernicious Cascades?H. Henry CaoUniversity of North Carolina (UNC) at Chapel Hill - Finance Area Bing HanUniversity of Texas at Austin - McCombs School of Business David A. HirshleiferUniversity of California, Irvine - Paul Merage School of Business August 17, 2009 Merage School of Business Working Paper, University of California, Irvine Abstract: 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, K00 working papers seriesDate posted: August 22, 2003 ; Last revised: September 16, 2010Suggested CitationContact Information
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