Do We Follow Others When We Should? A Simple Test of Rational Expectations

Weizsäcker, Georg

doi:10.1257/aer.100.5.2340

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American Economic Review: Vol. 100 No. 5 (December 2010)

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Do We Follow Others When We Should? A Simple Test of Rational Expectations

Article Citation

Weizsäcker, Georg. 2010. "Do We Follow Others When We Should? A Simple Test of Rational Expectations." American Economic Review, 100(5): 2340-60.

DOI: 10.1257/aer.100.5.2340

Abstract

The paper presents a meta dataset covering 13 experiments on social learning games. It is found that in situations where it is empirically optimal to follow others and contradict one's own information, the players err in the majority of cases, forgoing substantial parts of earnings. The average player contradicts her own signal only if the empirical odds ratio of the own signal being wrong, conditional on all available information, is larger than 2:1, rather than 1:1 as would be implied by rational expectations. A regression analysis formulates a straightforward test of rational expectations which strongly rejects the null. (JEL D82, D83, D84)

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Authors

Weizsäcker, Georg (U College London and DIW Berlin)

JEL Classifications

D82: Asymmetric and Private Information
D83: Search; Learning; Information and Knowledge; Communication; Belief
D84: Expectations; Speculations