Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory

Humboldt-University SFB 373 Working Paper

26 Pages Posted: 4 Oct 2001

See all articles by Dorothea Kübler

Dorothea Kübler

Social Science Research Center (WZB); Technische Universität Berlin (TU Berlin) - Faculty of Economics and Management

Georg Weizsacker

Humboldt University Berlin; DIW Berlin

Date Written: September 2001

Abstract

We examine the robustness of information cascades in laboratory experiments. Apart from the situation in which each player can obtain a signal for free (as in the experiment by Anderson and Holt, 1997, QTR {American Economic Review}), the case of costly signals is studied where players decide whether to obtain private information or not, at a small but positive cost. In the equilibrium of this game, only the first player buys a signal and chooses an urn based on this information whereas all following players do not buy a signal and herd behind the first player. The experimental results show that too many signals are bought and the equilibrium prediction performs poorly. To explain these observations, the depth of the subjects' reasoning process is estimated, using a statistical error-rate model. Allowing for different error rates on different levels of reasoning, we find that the subjects' inferences become significantly more noisy on higher levels of the thought process, and that only short chains of reasoning are applied by the subjects.

Suggested Citation

Kübler, Dorothea F. and Weizsacker, Georg, Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory (September 2001). Humboldt-University SFB 373 Working Paper. Available at SSRN: https://ssrn.com/abstract=283114 or http://dx.doi.org/10.2139/ssrn.283114

Dorothea F. Kübler

Social Science Research Center (WZB) ( email )

Reichpietschufer 50
D-10785 Berlin, 10785
Germany
40 30 25491440 (Phone)

HOME PAGE: http://www.wzb.eu/mp/vam/people/dorothea_kuebler.de.htm

Technische Universität Berlin (TU Berlin) - Faculty of Economics and Management ( email )

D-10623 Berlin
Germany
+49 30 31425263 (Phone)

HOME PAGE: http://www.wiwi-experimente.tu-berlin.de/

Georg Weizsacker (Contact Author)

Humboldt University Berlin ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

DIW Berlin

Mohrenstr. 58
Berlin
Germany

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