Social learning in continuous time : when are informational cascades more likely to be inefficient?

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Title: Social learning in continuous time : when are informational cascades more likely to be inefficient?
Authors: Pastine, IvanPastine, Tuvana
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Date: Nov-2006
Online since: 2008-12-03T14:59:52Z
Abstract: 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: Working Paper
Publisher: University College Dublin. School Of Economics
Series/Report no.: UCD Centre for Economic Research Working Paper Series; WP06/21
Copyright (published version): 2006 School Of Economics, University College Dublin
Keywords: Comparative StaticsHerdingHerd Manipulation
Subject LCSH: Social learning--Mathematical models
Collective behavior--Mathematical models
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Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Working Papers & Policy Papers

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