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American Economic Journal: Microeconomics: Vol. 2 No. 4 (November 2010)

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Naïve Herding in Rich-Information Settings

Article Citation

Eyster, Erik, and Matthew Rabin. 2010. "Naïve Herding in Rich-Information Settings." American Economic Journal: Microeconomics, 2(4): 221-43.

DOI: 10.1257/mic.2.4.221

Abstract

In social-learning environments, we investigate implications of the assumption that people naïvely believe that each previous person's action reflects solely that person's private information. Naïve herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. Such "social confirmation bias" leads them to herd with positive probability on incorrect actions even in extremely rich-information settings where rational players never do. Moreover, because they become fully confident even when wrong, naïve herders can be harmed, on average, by observing others. (JEL D82, D83)

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Authors

Eyster, Erik (London School of Economics)
Rabin, Matthew (U CA, Berkeley)

JEL Classifications

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

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