Taking the Road Less Traveled by: Does Conversation Eradicate Pernicious Cascades?

Cao, H. Henry; Han, Bing; Hirshleifer, David

doi:10.2139/ssrn.422180

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Taking the Road Less Traveled by: Does Conversation Eradicate Pernicious Cascades?

Merage School of Business Working Paper, University of California, Irvine

28 Pages Posted: 22 Aug 2003 Last revised: 31 Jul 2018

See all articles by H. Henry Cao

H. Henry Cao

University of North Carolina (UNC) at Chapel Hill - Finance Area

Bing Han

University of Toronto, Rotman School of Management

David Hirshleifer

University of Southern California - Marshall School of Business - Finance and Business Economics Department; National Bureau of Economic Research (NBER)

Date Written: August 17, 2009

Abstract

We offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads, despite communication of the payoff outcomes from past choices. This reflects both direct and indirect action-based information externalities. In contrast with previous cascades literature, cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever. Furthermore, the ability of individuals to communicate can reduce average decision accuracy and welfare.

Presentation slides available at https://ssrn.com/abstract=3217349.

Keywords: information cascades, herding, conversation, imitation, information externality

JEL Classification: D82, D83, G31, D23, K00

Suggested Citation: Suggested Citation

Cao, Huining Henry and Han, Bing and Hirshleifer, David, Taking the Road Less Traveled by: Does Conversation Eradicate Pernicious Cascades? (August 17, 2009). Merage School of Business Working Paper, University of California, Irvine, Available at SSRN: https://ssrn.com/abstract=422180 or http://dx.doi.org/10.2139/ssrn.422180