Abstract
Observational learning occurs when privately informed individuals sequentially choose among finitely many actions after seeing predecessors’ choices. We summarise the general theory of this paradigm: belief convergence forces action convergence; specifically, copycat ‘herds’ arise. Also, beliefs converge to a point mass on the truth exactly when the private information is not uniformly bounded. This subsumes two key findings of the original herding literature: With multinomial signals, cascades occur, where individuals rationally ignore their private signals, and incorrect herds start with positive probability. The framework is flexible – some individuals may be committed to an action, or individuals may have divergent cardinal or even ordinal preferences.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Similar content being viewed by others
Notes
- 1.
Still, it helps to introspect on exactly why no such contrarian can arise. Let the chance that the kth individual breaks the herd be pk, given the state. If these chances vanish fast enough that they are summable, then their tail sum can be made as small as desired. Then by conditional independence, the chance that no one among 1, 2, … , k breaks the herd is positive:
$$ \left(1-{p}_1\right)\cdots \left(1-{p}_k\right)>1-{p}_1-{p}_2-\cdots -{p}_k>0. $$
Bibliography
Anderson, L., and C.A. Holt. 2008. Information cascade experiments. In Macmillan Publishers Ltd, ed. S.N. Durlauf and L.E. Blume. New York: Palgrave MacMillan.
Banerjee, A.V. 1992. A simple model of herd behavior. Quarterly Journal of Economics 107: 797–817.
Bikhchandani, S., D. Hirshleifer, and I. Welch. 1992. A theory of fads, fashion, custom, and cultural change as information cascades. Journal of Political Economy 100: 992–1026.
Bikhchandani, S., D. Hirshleifer, and I. Welch. 2008. Information cascades. In Macmillan Publishers Ltd, ed. S.N. Durlauf and L.E. Blume. New York: Palgrave MacMillan.
Çelen, B., and S. Kariv. 2004. Distinguishing informational cascades from herd behavior in the laboratory. American Economic Review 94: 484–498.
Gale, D., and S. Kariv. 2008. Learning and information aggregation in networks. In Macmillan Publishers Ltd, ed. S.N. Durlauf and L.E. Blume. New York: Palgrave MacMillan.
Lee, I.H. 1993. On the convergence of informational cascades. Journal of Economic Theory 61: 395–411.
Ottaviani, M., and P.N. Sørensen. 2006. Professional advice. Journal of Economic Theory 126: 120–142.
Scharfstein, D.S., and J.C. Stein. 1990. Herd behavior and investment. American Economic Review 80: 465–479.
Smith, L., and P. Sørensen. 1994. An example of Non-martingale learning. MIT Working Paper.
Smith, L., and P. Sørensen. 2000. Pathological outcomes of observational learning. Econometrica 68: 371–398.
Smith, L., and P. N. Sørensen. 2008. Informational herding and optimal experimentation. University of Copenhagen Working Paper.
Sørensen, P. 1996. Rational social learning. PhD thesis, MIT.
Vives, X. 1993. How fast do rational agents learn? Review of Economic Studies 60: 329–347.
Author information
Authors and Affiliations
Editor information
Copyright information
© 2018 Macmillan Publishers Ltd.
About this entry
Cite this entry
Smith, L., Sørensen, P.N. (2018). Observational Learning. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2990
Download citation
DOI: https://doi.org/10.1057/978-1-349-95189-5_2990
Published:
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-95188-8
Online ISBN: 978-1-349-95189-5
eBook Packages: Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences