Rational and Naive Herding

53 Pages Posted: 26 Aug 2009

See all articles by Erik Eyster

Erik Eyster

London School of Economics & Political Science (LSE) - Department of Economics

Matthew Rabin

University of California, Berkeley - Department of Economics

Date Written: July 2009

Abstract

In social-learning environments, we investigate implications of the assumption that people naively believe that each previous person's action reflects solely that person's private information, leading them to systematically imitate all predecessors even in the many circumstances where rational agents do not. Naive herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. They herd with positive probability on incorrect actions across a broad array of rich-information settings where rational players never do, and - because they become fully confident even when wrong - can be harmed on average by observing others.

Keywords: Cursed equiliibrium, Herding, Naive inference, Social Learning

JEL Classification: B49

Suggested Citation

Eyster, Erik and Rabin, Matthew, Rational and Naive Herding (July 2009). CEPR Discussion Paper No. DP7351, Available at SSRN: https://ssrn.com/abstract=1461980

Erik Eyster (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Matthew Rabin

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

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