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Limited depth of reasoning and failure of cascade formation in the laboratory

Kübler, Dorothea and Weizsäcker, Georg (2004) Limited depth of reasoning and failure of cascade formation in the laboratory. Review of Economic Studies, 71 (2). pp. 425-441. ISSN 1467-937X

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Abstract

We examine the robustness of information cascades in laboratory experiments. Apart from the situation in which each player can obtain a signal for free (as in the experiment by Anderson and Holt (1997), the case of costly signals is studied where players decide whether or not to obtain private information, at a small but positive cost. In the equilibrium of this game, only the first player buys a signal and makes a decision based on this information whereas all following players do not buy a signal and herd behind the first player. The experimental results show that too many signals are bought and the equilibrium prediction performs poorly. To explain these observations, the depth of the subjects' reasoning process is estimated, using a statistical error-rate model. Allowing for different error rates on different levels of reasoning, we find that the subjects' inferences become significantly more noisy on higher levels of the thought process, and that only short chains of reasoning are applied by the subjects.

Item Type: Article
Official URL: http://www.blackwellpublishing.com/journals/ROES
Additional Information: This is an electronic version of an Article published in the Review of Economic Studies, Volume 71 Issue 2 Page 425 - April 2004 © 2004 Blackwell Publishing. The definitive version is available at www.blackwell-synergy.com. LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website.
Library of Congress subject classification: H Social Sciences > H Social Sciences (General)
Sets: Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 01 Dec 2005
URL: http://eprints.lse.ac.uk/508/

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