Working Paper: CEPR ID: DP7351
Authors: Erik Eyster; Matthew Rabin
Abstract: In social-learning environments, we investigate implications of the assumption that people naively believe that each previous person's action reflects solely that person's private information, leading them to systematically imitate all predecessors even in the many circumstances where rational agents do not. Naive herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. They herd with positive probability on incorrect actions across a broad array of rich-information settings where rational players never do, and---because they become fully confident even when wrong---can be harmed on average by observing others.
Keywords: Cursed Equilibrium; Herding; Naive Inference; Social Learning
JEL Codes: B49
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| naive herders systematically imitate predecessors (C92) | naive herders converge on incorrect actions (C92) |
| naive herders overweight early movers' private signals (C92) | naive herders converge on incorrect actions (C92) |
| predecessors' actions influence subsequent players' beliefs (C73) | naive herders converge on incorrect actions (C92) |
| naive herders misinterpret information contained in observed actions (C92) | naive herders converge on incorrect actions (C92) |
| naive herders become overly confident in wrong actions (C92) | significant probability of making incorrect choices (D81) |
| successive players miscount signals from earlier players (C73) | increasingly skewed beliefs (C46) |
| naive herding leads to harmful outcomes (C92) | overconfidence in erroneous beliefs (D83) |