Informational Herding as Experimentation Deja Vu

MIT, Department of Economics, Working Paper No. 96-9

Posted: 2 Dec 1998

See all articles by Lones Smith

Lones Smith

University of Wisconsin at Madison - Department of Economics

Peter Norman Sorensen

University of Copenhagen - Department of Economics

Date Written: March 1996

Abstract

We prove that the recently proposed informational herding models are but special cases of a standard single person experimentation model with myopia. We then re-interpret the incorrect herding outcome as a familiar failure of complete learning in a optimal experimentation problem.

We next explore that experimentation model with patient individuals -- or equivalently, the observational learning model where individuals care about successors. As such, we find that even when individuals internalize the herding externality in this fashion, incorrect herds and incomplete learning still obtain. We note that this outcome can be implemented as aconstrained social optimum when decentralized.

JEL Classification: D83

Suggested Citation

Smith, Lones and Sorensen, Peter Norman, Informational Herding as Experimentation Deja Vu (March 1996). MIT, Department of Economics, Working Paper No. 96-9, Available at SSRN: https://ssrn.com/abstract=139525

Lones Smith (Contact Author)

University of Wisconsin at Madison - Department of Economics ( email )

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HOME PAGE: http://www.lonessmith.com

Peter Norman Sorensen

University of Copenhagen - Department of Economics ( email )

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Denmark
+45 35 32 3056 (Phone)

HOME PAGE: http://www.econ.ku.dk/sorensen

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