Social learning in continuous time : when are informational cascades more likely to be inefficient?
03T14:59:52Z December 2008
In an observational learning environment rational agents may mimic the actions of the predecessors even when their own signal suggests the opposite. In case early movers’ signals happen to be incorrect society may settle on a common inefficient action, resulting in an inefficient informational cascade. This paper models observational learning in continuous time with endogenous timing of moves. This permits the analysis of comparative statics results. The effect of an increase in signal quality on the likelihood of an inefficient cascade is shown to be nonmonotonic. If agents do not have strong priors, an increase in signal quality may lead to a higher probability of inefficient herding. The analysis also suggests that markets with quick response to investment decisions, such as financial markets, may be more prone to inefficient collapses.
Type of Material
University College Dublin. School Of Economics
UCD Centre for Economic Research Working Paper Series
Copyright (Published Version)
2006 School Of Economics, University College Dublin
Subject – LCSH
Social learning--Mathematical models
Collective behavior--Mathematical models
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License