Observational Learning

Observational Learning”, Smith and Sorensen (New Palgrave, 2011)

Observational learning occurs when privately-informed individuals sequentially choose among finitely many actions, after seeing predecessors’ choices. We summarize the general theory of this paradigm: Belief convergence forces action convergence, specifically, copycat “herds” arise. Also, beliefs converge to a point mass on the truth exactly when the private information is not uniformly bounded. This subsumes two key findings of the original herding literature: With multinomial signals, cascades occur, where individuals rationally ignore their private signals, and incorrect herds start with positive probability. The framework is flexible— some individuals may be committed to an action, or individuals may have divergent cardinal or even ordinal preferences.