COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1738 Biased Social Learning Helios Herrera and Johannes Hörner November 2009 This paper examines social learning when only one of the two types of decisions is
observable. Because agents arrive randomly over time, and only those who invest are
observed, later agents face a more complicated inference problem than in the standard
model, as the absence of investment might reflect either a choice not to invest, or a lack
of arrivals. We show that, as in the standard model, learning is complete if and only if
signals are unbounded. If signals are bounded, cascades may occur, and whether they are
more or less likely than in the standard model depends on a property of the signal
distribution. If the hazard ratio of the distributions increases in the signal, it is more
likely that no one invests in the standard model than in this one, and welfare is higher.
Conclusions are reversed if the hazard ratio is decreasing. The monotonicity of the hazard
ratio is the condition that guarantees the presence or absence of informational cascades
in the standard herding model. |
