The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Observational Learning

  • Lones Smith
  • Peter Norman Sørensen
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2990

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.

Keywords

Action herd Experimentation Information aggregation Informational cascade Informational herding Limit cascade Markov process Martingale Observational learning Social learning Stochastic difference equation 

JEL Classifications

D8 D83 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Lones Smith
    • 1
  • Peter Norman Sørensen
    • 1
  1. 1.