bus.dec.lec.23

bus.dec.lec.23 - Herd Behavior, Bubbles, and Crashes...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Herd Behavior, Bubbles, and Crashes Business Decisions SOC 138/ECO 149
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Joining the Herd Beliefs, behaviors in the real world are highly correlated by proximity, mutual observability, and interaction – why? One important factor: imitation Some imitative processes are largely cognitive in nature (e.g., raw associative learning), but others stem from strategic factors “Herd behavior”: imitation or mimicry stemming from informational or strategic processes
Background image of page 2
3 Information Cascades A basic model of herd behavior, first put forward by Banerjee (1992) and Bikchandani et al. (1992) Ingredients: Multiple decision makers One best choice among many possibilities Each decision maker gets a private signal Decision makers forced to act sequentially Each decision maker can see the choices of those who have gone before Dynamic: first actors follow their signals, but later actors throw away their own information to follow the crowd – thus, the group as a whole underutilizes its information
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Example: Picking a Winner Imagine I investors who must choose one from a set of P portfolios Only one of the P is a high performer Each investor receives a signal as to the best option, which is true with probability Signals randomly allocated, and 1> >1/P Investors must move sequentially Dynamic: investors follow own signals until two choose the same option, after which everyone else follows this choice “Crowding” on early favorites draws later investors On average, however, more people will lose out under this model than if each was forced to act separately Herding is individually rational, but collectively inefficient
Background image of page 4
5 Informational Influences We have already mentioned the power of social
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/17/2011 for the course ECON 149 taught by Professor Sohrabian during the Fall '08 term at UC Irvine.

Page1 / 15

bus.dec.lec.23 - Herd Behavior, Bubbles, and Crashes...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online