CFDP 1552

Informational Herding and Optimal Experimentation

Author(s): 

Publication Date: January 2006

Pages: 39

Abstract: 

We show that far from capturing a formally new phenomenon, informational herding is really a special case of single-person experimentation — and ‘bad herds’ the typical failure of complete learning. We then analyze the analogous team equilibrium, where individuals maximize the present discounted welfare of posterity. To do so, we generalize Gittins indices to our non-bandit learning problem, and thereby characterize when contrarian behaviour arises: (i) While herds are still constrained efficient, they arise for a strictly smaller belief set. (ii) A log-concave log-likelihood ratio density robustly ensures that individuals should lean more against their myopic preference for an action the more popular it becomes.

Keywords: 

Bayesian learning, value function, herding, experimentation, log concavity, Gittins index, team equilibrium

JEL Classification Codes:  D83