Excessive Herding in the Laboratory: The Role of Intuitive Judgments

48 Pages Posted: 15 Mar 2018

See all articles by Christoph March

Christoph March

Government of the Federal Republic of Germany - Federal Ministry of Education and Research; University of Bamberg

Anthony Ziegelmeyer

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics; Queen's University Belfast - Queen's Management School

Date Written: January 30, 2018

Abstract

We designed four observational learning experiments to identify the key channels that, along with Bayes-rational inferences, drive herd behavior. In Experiment 1, unobserved, whose actions remain private, learn from the public actions made in turn by subjects endowed with private signals of medium quality. We find that when unobserved face a handful of identical actions that contradict their high quality signals they herd more extensively than predicted by Bayes-rational herding. Deviations from the normative solution result in severe expected losses and unobserved would be better off without the chance to learn from others. When unobserved are endowed with medium quality signals they learn rather successfully from public actions, but they overweight their low quality signals relative to public information. Experiments 2-4 reveal that non-Bayesian updating and informational misinferences are the two channels that drive excessive herding, while the strong (resp. mild) overemphasis on low (resp. medium) quality signals is caused by wrong expectations about others’ strategy. A model of intuitive observational learning accounts for the phenomenon of excessive herding, it captures well herd behavior with medium quality signals, but it fails to predict that the reluctance to contradict private signals is stronger for low than for medium quality.

Keywords: observational learning, herd behavior, intuitive judgments, experiments

JEL Classification: C920, D820, D830, D840

Suggested Citation

March, Christoph and Ziegelmeyer, Anthony, Excessive Herding in the Laboratory: The Role of Intuitive Judgments (January 30, 2018). CESifo Working Paper Series No. 6855, Available at SSRN: https://ssrn.com/abstract=3140365 or http://dx.doi.org/10.2139/ssrn.3140365

Christoph March

Government of the Federal Republic of Germany - Federal Ministry of Education and Research ( email )

Hannoversche Straße 28 - 30
Berlin, 10115
Germany

University of Bamberg ( email )

Kirschaeckerstrasse 39
Bamberg, 96045
Germany

Anthony Ziegelmeyer (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

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