INFORMATION CASCADES IN THE LABORATORY

INFORMATION CASCADES IN THE LABORATORY

| Lisa R. Anderson and Charles A. Holt
This paper presents an experiment on information cascades in a laboratory setting. The study investigates how individuals with private information make public predictions, and how initial conformity can lead to an information cascade where later predictions align with early announcements. The experiment involves subjects who draw balls from urns labeled A and B, with each urn containing a specific number of balls. Subjects are asked to predict which urn was used based on their private draw. If the first few predictions align, subsequent decision-makers may follow this pattern, even if their private information suggests otherwise. The paper discusses the concept of information cascades, where individuals ignore their private information and follow the decisions of others. This can lead to a cascade of incorrect decisions, especially if the initial decisions are based on misleading signals. The study also explores the possibility of reverse cascades, where initial decisions are based on incorrect information, but subsequent decisions may correct this error. The experiment shows that subjects often follow the decisions of others, even when their private information suggests otherwise. This behavior is influenced by a status quo bias, where individuals prefer to follow the decisions of others rather than make independent judgments. The study also finds that subjects may use a counting heuristic, where they rely on the number of previous decisions rather than Bayesian reasoning. The paper concludes that information cascades can occur in laboratory settings, and that subjects often follow the decisions of others, even when their private information suggests otherwise. The study highlights the importance of understanding the factors that influence decision-making in the presence of information cascades.This paper presents an experiment on information cascades in a laboratory setting. The study investigates how individuals with private information make public predictions, and how initial conformity can lead to an information cascade where later predictions align with early announcements. The experiment involves subjects who draw balls from urns labeled A and B, with each urn containing a specific number of balls. Subjects are asked to predict which urn was used based on their private draw. If the first few predictions align, subsequent decision-makers may follow this pattern, even if their private information suggests otherwise. The paper discusses the concept of information cascades, where individuals ignore their private information and follow the decisions of others. This can lead to a cascade of incorrect decisions, especially if the initial decisions are based on misleading signals. The study also explores the possibility of reverse cascades, where initial decisions are based on incorrect information, but subsequent decisions may correct this error. The experiment shows that subjects often follow the decisions of others, even when their private information suggests otherwise. This behavior is influenced by a status quo bias, where individuals prefer to follow the decisions of others rather than make independent judgments. The study also finds that subjects may use a counting heuristic, where they rely on the number of previous decisions rather than Bayesian reasoning. The paper concludes that information cascades can occur in laboratory settings, and that subjects often follow the decisions of others, even when their private information suggests otherwise. The study highlights the importance of understanding the factors that influence decision-making in the presence of information cascades.
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[slides and audio] Information Cascades in the Laboratory