Pathological models of observational learning

50 Pages·1994·1.4 MB·English

by  Smith, Lones A., 1965-

Hffi
TB^v /
of
DEWEY
M.I.T. LIBRARIES -
Digitized by the Internet Archive
in 2011 with funding from
Boston Library Consortium Member Libraries
http://www.archive.org/details/pathologicalmodeOOsmit
» HB31 Dewey
.M415
AO
,
working paper
department
of economics
PATHOLOGICAL MODELS
OF OBSERVATIONAL LEARNING
Lones Smith
Peter S^rensen
94-24 July 1994
massachusetts
institute of
technology
50 memorial drive
Cambridge, mass. 02139

PATHOLOGICAL MODELS
OF OBSERVATIONAL LEARNING
Lones Smith
Peter S^rensen
94-24 July 1994
L«icF-fTSINSTITUTE
OCT 2 1 1994
Pathological Models of Observational Learning"
Lones Smith*
and
Peter Sorensen*
Department of Economics
Massachusetts Institute of Technology
MA
Cambridge, 02139
(Preliminary version. Comments encouraged.)
July 27, 1994
Abstract
This paper systematically analyzes the observational learning paradigm of
Banerjee (1992) and Bikhchandani, Hirshleifer and Welch (1992). We first
relax the informational assumption that is the linchpin of the "herding' re-
sults, namely that individuals' private signals are uniformly bounded in their
strength. We then investigate the model with heterogeneous preferences, and
discover that a 'twin' observational pathology generically appears: Optimal
learning may well lead to a situation where no one can draw any inference
at all from history! We also point out that counterintuitively. even with a
constant background "noise" induced by trembling or crazy individuals, public
beliefs generically converge to the true state of the world.
All results are cast within a simple dynamic mathematical framework that
is (i) rich enough to describe a rich array of observational learning dynamics;
and (ii) amenable to economic modifications that hinder or abet informational
transmission, and sometimes permit full belief convergence to occur.
"The authors wish to thank participants at the MIT theory lunch, in particular Abhijit Banerjee. for
their comments on a somewhat related paper. We are especially grateful to Chris Avery, who was very
instrumental at an early stage in this project. All errors remain our responsibility. Sorensen gratefully
acknowledges financial support for this work from the Danish Social Sciences Research Council.
^e-mail address: lonesClone3.n1it.edu
'e-mail address: petersorfimit edu
.