Informational herding, optimal experimentation, and contrarianism
Research output: Contribution to journal › Journal article › Research › peer-review
Standard
Informational herding, optimal experimentation, and contrarianism. / Smith, Lones; Sørensen, Peter Norman; Tian, Jianrong.
In: Review of Economic Studies, Vol. 88, No. 5, 01.10.2021, p. 2527-2554.Research output: Contribution to journal › Journal article › Research › peer-review
Harvard
APA
Vancouver
Author
Bibtex
}
RIS
TY - JOUR
T1 - Informational herding, optimal experimentation, and contrarianism
AU - Smith, Lones
AU - Sørensen, Peter Norman
AU - Tian, Jianrong
N1 - Publisher Copyright: © The Author(s) 2021.
PY - 2021/10/1
Y1 - 2021/10/1
N2 - In the standard herding model, privately informed individuals sequentially see prior actions and then act. An identical action herd eventually starts and public beliefs tend to "cascade sets"where social learning stops. What behaviour is socially efficient when actions ignore informational externalities? We characterize the outcome that maximizes the discounted sum of utilities. Our four key findings are: (1) cascade sets shrink but do not vanish, and herding should occur but less readily as greater weight is attached to posterity. (2) An optimal mechanism rewards individuals mimicked by their successor. (3) Cascades cannot start after period one under a signal log-concavity condition. (4) Given this condition, efficient behaviour is contrarian, leaning against the myopically more popular actions in every period. We make two technical contributions: As value functions with learning are not smooth, we use monotone comparative statics under uncertainty to deduce optimal dynamic behaviour. We also adapt dynamic pivot mechanisms to Bayesian learning.
AB - In the standard herding model, privately informed individuals sequentially see prior actions and then act. An identical action herd eventually starts and public beliefs tend to "cascade sets"where social learning stops. What behaviour is socially efficient when actions ignore informational externalities? We characterize the outcome that maximizes the discounted sum of utilities. Our four key findings are: (1) cascade sets shrink but do not vanish, and herding should occur but less readily as greater weight is attached to posterity. (2) An optimal mechanism rewards individuals mimicked by their successor. (3) Cascades cannot start after period one under a signal log-concavity condition. (4) Given this condition, efficient behaviour is contrarian, leaning against the myopically more popular actions in every period. We make two technical contributions: As value functions with learning are not smooth, we use monotone comparative statics under uncertainty to deduce optimal dynamic behaviour. We also adapt dynamic pivot mechanisms to Bayesian learning.
KW - C73
KW - Cascade
KW - Contrarian
KW - D82
KW - D83
KW - Efficiency
KW - Herding
KW - Logconcavity
KW - Mimicking
KW - Monotonicity
U2 - 10.1093/restud/rdab001
DO - 10.1093/restud/rdab001
M3 - Journal article
AN - SCOPUS:85118156165
VL - 88
SP - 2527
EP - 2554
JO - Review of Economic Studies
JF - Review of Economic Studies
SN - 0034-6527
IS - 5
ER -
ID: 291019569