Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/32567
Year of Publication: 
2009
Series/Report no.: 
Jena Economic Research Papers No. 2009,105
Publisher: 
Friedrich Schiller University Jena and Max Planck Institute of Economics, Jena
Abstract: 
We revisit the economic models of social learning by assuming that individuals update their beliefs in a non-Bayesian way. Individuals either overweigh or underweigh (in Bayesian terms) their private information relative to the public information revealed by the decisions of others and each individual's updating rule is private information. First, we consider a setting with perfectly rational individuals with a commonly known distribution of updating rules. We show that introducing heterogeneous updating rules in a simple social learning environment reconciles equilibrium predictions with laboratory evidence. Additionally, a model of social learning with bounded private beliefs and sufficiently rich updating rules corresponds to a model of social learning with unbounded private beliefs. A straightforward implication is that heterogeneity in updating rules is efficiency-enhancing in most social learning environments. Second, we investigate the implications of heterogeneous updating rules in social learning environments where individuals only understand the relation between the aggregate distribution of decisions and the state of the world. Unlike in rational social learning, heterogeneous updating rules do not lead to a substantial improvement of the societal welfare and there is always a non-negligible likelihood that individuals become extremely and wrongly confident about the state of the world
Subjects: 
Social learning
Non-Bayesian updating
Herding
Informational cascades
JEL: 
D82
D83
Document Type: 
Working Paper

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