Can Herding Improve Investment Decisions?
48 Pages Posted: 24 Dec 2008 Last revised: 14 Mar 2010
Date Written: March 10, 2010
Abstract
Existing models show that herding in decisions can cause signicant information loss, inferior information aggregation and impaired decision making. However, we show that in a multi-stage decision setting with endogenous information production, herding on the initial decision can actually result in superior aggregate information and improved decisions. This is because the possibility of herding by a follower incentivizes the leader to increase its ex-ante information production to an extent that it can dominate the information loss from herding. Examples include decisions to enter new markets, fund R&D, and provide early-stage venture capital.
Keywords: herding, entry, information, cascades, innovation, venture capital
JEL Classification: D80, G20, G30
Suggested Citation: Suggested Citation
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