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Published August 1, 2017 | Submitted
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Self-correcting Information Cascades

Abstract

In laboratory experiments, information cascades are ephemeral phenomena, collapsing soon after they form, and then reforming again. These formation/collapse/reformation cycles occur frequently and repeatedly. Cascades may be reversed (collapse followed by a cascade on a different state) and more often than not, such a reversal is self-correcting: the cascade switches from the incorrect to the correct state. Past experimental work focused on relatively short horizons, where these interesting dynamics are rarely observed. We present experiments with a longer horizon, and also investigate the effect of signal informativeness. We propose a theoretical model, based on quantal response equilibrium, where temporary and self-correcting cascades arise as equilibrium phenomena. The model also predicts the systematic differences we observe experimentally in the dynamics, as a function of signal informativeness. We extend the basic model to include a parameter measuring base rate neglect and find it to be a statistically significant factor in the dynamics, resulting in somewhat faster rates of social learning.

Additional Information

1Financial support from the National Science Foundation (SBR-0098400 and SES-0079301) and the Alfred P. Sloan Foundation is gratefully acknowledged. The theory and experimental design was partially completed, and pilot experiments were conducted in collaboration with Richard McKelvey, who died in April 2002. He is not responsible for any errors in the paper. We acknowledge helpful comments from Bogacen Celen, Terry Sovinsky, seminar participants at UCLA, NYU, Harvard University, Universitat Autonoma de Barcelona, University of Edinburgh, Washington University, the 2003 annual meeting of ESA in Pittsburgh, the 2003 Malaga Workshop on Social Choice and Welfare Economics, the 2003 SAET meetings in Rhodos, and the 2003 ESSET meetings in Gerzensee. We thank Iva Rashkova for research assistance. Published as Goeree, J.K., Palfrey, T.R., Rogers, B.W., & McKelvey, R.D. (2007). Self-correcting information cascades. The Review of Economic Studies, 74(3), 733-762.

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