Chapter 39 Information Cascade Experiments

This chapter focuses on the information cascade experiments. The concept of an information cascade can be explained in the context of a specific numerical example that was used in initial laboratory experiments. The predictions are publicly announced as they are made, but individuals are not able to observe others' private signals. The first person in the sequence must predict only on the basis of private information. All of the analysis is based on the assumption that others do not make mistakes, and we conjecture that the anomalous behavior patterns may be explained by incorporating the possibility of decision error. When others may make errors, the option of following one's own information becomes more attractive. Even though these applications are motivated by naturally occurring institutions, the usefulness of field data is limited by the fact that the private information of traders and/or betters typically cannot be observed. Laboratory experiments are particularly useful in examining herding behavior because private information is observed by the experimenter and the flow is information can be precisely controlled.