Following the Actions of Others: The Simple Average of Strategies in a Rational Expectations Economy

46 Pages Posted: 30 Aug 2022 Last revised: 24 Feb 2023

See all articles by Youcheng Lou

Youcheng Lou

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science (AMSS)

Moris Simon Strub

University of Warwick - Warwick Business School

Shouyang Wang

Chinese Academy of Sciences (CAS) - Center for Forecasting Science; Academy of Mathematics and Systems Sciences

Date Written: August 9, 2022

Abstract

We study an alternative mechanism of social learning in a rational expectations equilibrium economy where agents learn from the actions of others by adopting the simple average of ex ante optimal strategies of their social network. When information is exogenous, large social networks benefit all agents if and only if agents are relatively homogeneous in terms of information precision. In contrast, a setting where both information acquisition and network formation are endogenous leads to small social networks in equilibrium. Both solitary action and large social networks are unstable as agents have an incentive to form, respectively disintegrate into, small social networks of just two or three agents. However, each agent would benefit if larger networks were imposed on the entire economy by a central agent. We further show that imposing large social networks on the economy reduces information acquisition, market efficiency, market liquidity, and trading volume, while increasing return volatility.

Keywords: Simple Average of Strategies, Rational Expectations Equilibrium, Information Acquisition, Social Networks

JEL Classification: D82, G14

Suggested Citation

Lou, Youcheng and Strub, Moris Simon and Wang, Shouyang, Following the Actions of Others: The Simple Average of Strategies in a Rational Expectations Economy (August 9, 2022). Available at SSRN: https://ssrn.com/abstract=4185280 or http://dx.doi.org/10.2139/ssrn.4185280

Youcheng Lou (Contact Author)

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science (AMSS) ( email )

Beijing
China

Moris Simon Strub

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Shouyang Wang

Chinese Academy of Sciences (CAS) - Center for Forecasting Science; Academy of Mathematics and Systems Sciences ( email )

China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
62
Abstract Views
582
Rank
667,705
PlumX Metrics