Self-Correcting Information Cascades

Abstract

We report experimental results from long sequences of decisions in environments that are theoretically prone to severe information cascades. Observed behaviour is much different-information cascades are ephemeral. We study the implications of a theoretical model based on quantal response equilibrium, in which the observed cascade formation/collapse/formation cycles arise as equilibrium phenomena. Consecutive cascades may reverse states, and usually such a reversal is self-correcting: the cascade switches to the correct state. These implications are supported by the data. We extend the model to allow for base rate neglect and find strong evidence for overweighting of private information. The estimated belief trajectories indicate fast and efficient learning dynamics. Copyright 2007 The Review of Economic Studies Limited.

Do We Follow Others When We Should? A Simple Test of Rational Expectations

“…A disadavantage of not imposing a behavioral model is that we learn little about the nature of the suboptimality. Yet the results are supportive of the model estimates by Nöth and Weber (2003) and Goeree et al (2007), which suggest that people assign too much weight to their own private information, relative to the publically observable choices of others. 4 But can the high error rate perhaps be attributed to the lack of strong incentives?…”

“…Variants of Quantal Response Equilibirum are discussed in Oberhammer and Stiehler (2003), Kübler and Weizsäcker (2004), Choi, Gale, and Kariv (2004), Drehmann, Oechssler and Roider (2005), Krämer, Nöth and Weber (2006) and Goeree et al (2007). 1 alternatives) in less than half of the cases.…”

“…The existing literature has largely sidestepped a detailed discussion of payo¤ outcomes -as opposed to behavioral outcomes -and most studies merely contain measures of overall earnings in the experiment. A notable exception is in Goeree et al's (2007) discussion of higher average earnings of players who choose later in the game. 5 The complication is particularly severe in social learning games, where uncertainty about others'strategies prevails so that the value of the available information (here, the observation of others'actions) is unknown to the researcher.…”

“…Willinger and Ziegelmeyer (1998) were the …rst to raise the tendency to follow the own signal, which was later discussed most explicitly in Nöth and Weber (2003) and Goeree et al (2007). In the model estimates of Goeree et al (2007), the weight on the own signals is estimated to be signi…cantly higher than the weight of a player's belief before observing the signal.…”

“…Willinger and Ziegelmeyer (1998) were the …rst to raise the tendency to follow the own signal, which was later discussed most explicitly in Nöth and Weber (2003) and Goeree et al (2007). In the model estimates of Goeree et al (2007), the weight on the own signals is estimated to be signi…cantly higher than the weight of a player's belief before observing the signal. In the error-rate analyses of Weber (2003), Oberhammer andStiehler (2003), Kübler and Weizsäcker (2004) and Kraemer, Nöth and Weber (2006), related arguments are given in the observations that the participants appear to attribute too low precision to other players.…”