Naive Herding in Rich-Information Settings

摘要

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. Naive herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. Such "social confirmation bias" leads them to herd with positive probability on incorrect actions even in extremely rich-information settings where rational players never do. Moreover, because they become fully confident even when wrong, naive herders can be harmed, on average, by observing others.