Fragility of information cascades: an experimental study using elicited beliefs

Abstract

This paper examines the occurrence and fragility of information cascades in two laboratory experiments. One group of low informed participants sequentially guess which of two states has been randomly chosen. In a matched pairs design, another group of high informed participants make similar guesses after having observed the guesses of the low informed participants. In the second experiment, participants' beliefs about the chosen state are elicited. In equilibrium, low informed players who observe an established pattern of identical guesses herd without regard to their pri- vate information whereas high informed players always guess according to their private information. Equilibrium behavior implies that information cascades emerge in the group of low informed participants, the belief based solely on cascade guesses is stationary, and information cascades are systematically broken by high informed participants endowed with private information contradicting the cascade guesses. Experimental results show that the behavior of low informed participants is qualitatively in line with the equilibrium prediction. Information cascades often emerge in our experiments. The tendency of low informed participants to engage in cascade behavior increases with the number of identical guesses. Our main finding is that information cascades are not fragile. The behavior of high informed participants differs markedly from the equilibrium prediction. Only one-third of laboratory cascades are broken by high informed participants endowed with private information contradicting the cascade guesses. The relative frequency of cascade breaks is 15% for the situations where five or more identical guesses are observed. Participants' elicited beliefs are strongly consistent with their own behavior and show that, unlike in equilibrium, the more cascade guesses participants observe the more they believe in the state favored by those guesses.

First- and second-order subjective expectations in strategic decision-making: Experimental evidence

“…• Do you have any comments about this experiment? 21 We found that the answers, especially to the first question, provide an insight into the decision rules employed by the participants. As far as we know, we are the first to explore the possibility and the usefulness of asking directly participants to explain how they reached decisions.…”

Do We Follow Others when We Should? A Simple Test of Rational Expectations: Comment

“…On the other hand, the ZM K meta-dataset includes all 1,440 observations from Ziegelmeyer, Koessler, Bracht, and Winter (2010) as well as the 1,080 individual observations from the P IT treatment of Fahr and Irlenbusch (2011).…”

Stated Beliefs and Play in Normal-Form Games

“…The studies by Mason and Phillips (2001), Nyarko and Schotter (2002), Camerer, Ho, Chong and Weigelt (2002, expands on a 1988 talk), Ehrblatt, Hyndman, Ozbay and Schotter (2006), Rutstrom and Wilcox (2007), Fehr and Kübler (2007), and Palfrey and Wang (2007) elicit beliefs in repeated games, while Haruvy (2002), Bhatt and Camerer (2005), Ivanov (2006) and Rey Biel (2007) discuss elicited beliefs in normal‐form games. Some studies on cascade game experiments also elicit beliefs; see Ziegelmeyer, Bracht, Koessler and Winter (2002), and Dominitz and Hung (2004).…”