Information Cascades: Replication and an Extension to Majority Rule and Conformity Rewarding Institutions

Abstract

In a randomly determined order, each agent was given an independent, private signal about which of two states was selected by a random draw. After receiving the private signal each agent made a publicly announced decision about the state. Thus, at the time of personal decision each agent had a private signal and also knew the decisions of all preceding agents. The experiments focused on three different types of organization. (1) Agents were rewarded according to whether their announced decision was right or wrong. This "individualistic institution" is the one studied by Anderson and Holt (AER, 1997). Their discovery of information cascades is replicated. (2) Agents were rewarded according to whether a majority of announced decisions were right or wrong. Under this "majority rule institution" the instance of information cascades is sharply reduced. (3) Agents are rewarded more according to whether their personal announced decision was the same as the majority decision than they were rewarded if their decision was correct. This "conformity rewarding institution" is motivated by proceedings in which there is incentive to produce reports that conform to the reports of others. Substantial information cascades are observed.

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