During an informational cascade, all traders with the same preferences choose the same action, following the market herding or going against it contrarianism. We also study financial contagion by extending our model to a two-asset economy. We show that informational cascades in one market can be generated by informational spillovers from the other.
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Such spillovers have pathological consequences, generating long-lasting misalignments between prices and fundamentals. Keywords: herd behavior ; financial contagion ; social learning ; informational cascades ; financial crises. Citation Information: The B. Export Citation. Here you can find all Crossref-listed publications in which this article is cited. User Account Log in Register Help. Search Close Advanced Search Help.
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More options …. The B. Journal of Theoretical Economics. Editor-in-Chief: Schipper, Burkhard. See all formats and pricing. Online ISSN See all formats and pricing Online. Prices are subject to change without notice.
Prices do not include postage and handling if applicable. Volume 18 Issue 2 Jul Issue 1 Jan Volume 17 Issue 2 Jun Issue 1 Jan Volume 16 Issue 2 Jun , pp. Volume 15 Issue 2 Jul , pp. Volume 14 Issue 1 Jan , pp. Volume 13 Issue 1 Jan , pp. Volume 12 Issue 1 Jan Volume 11 Issue 1 Jan Volume 10 Issue 1 Jan Volume 9 Issue 2 Nov Issue 1 Jan Volume 8 Issue 1 Jan Volume 7 Issue 1 Jan Volume 6 Issue 1 Feb , pp. Volume 5 Issue 1 Jan Volume 4 Issue 1 Jan Volume 3 Issue 1 Jan Volume 2 Issue 1 Feb Volume 1 Issue 1 Nov This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press.
Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. To the memory of my father. Social Learning 17 2 Bayesian Tools 19 2. Coordination 11 Guessing to Coordinate Financial Herding 14 Sequences of Financial Trades Learning by individuals from the behavior of others and imitation pervade the social life. Issues related to such learning have been debated since the beginning of the social sciences, more than a century ago.
The purpose of this book is to give an account of these studies.
The setting is one of rational agents with limited information who share that information with others through their actions. The properties of the learning process are analyzed from a theoretical point of view, but some empirical studies are discussed in relation to the theoretical results. Special attention is devoted to the pathologies of social learning by rational agents.
Herds appear to be obvious examples of failures of social learning. Indeed, herds, fads, bubbles, crashes, and booms are cited as proofs of the irrationality of individuals. However, most of these colorful events will appear in the models of rational agents studied in this book. The assumption of rationality may seem a bit narrow. Indeed, at this stage of the evolution of research, the concept of rationality itself is beginning to be seriously investigated.
Both levels will demand some intellectual concentration, however. For each chapter, the results and the methodology are described in an informal introduction. These parts of the book should be accessible to a wide audience of readers who are interested in the issues and are prepared to follow logical arguments, sometimes with a bit of formalism.
The main subjects have been selected with a personal bias, and are presented in their essence. The models are analyzed rigorously without some of the baggage that is sometimes required by professional journals. In a number of cases, the analysis had to be adapted, or even rewritten, for that purpose.
Herd Behavior and Contagion in Financial Markets : The B.E. Journal of Theoretical Economics
The techniques do not use highbrow mathematics. The purpose of the book is to shorten that time for the student before he goes to the frontline papers and does research about theoretical or empirical topics. A number of people have made contributions to this book, some decisive for its com- pletion. Jay Surti at Boston University was an ideal Ph. Lones Smith provided stimulating discussions. My colleagues at Boston University provided intellectual camaraderie. Scott Parris of Cambridge University Press was a strong believer from the start many years ago and never doubted.
To Mari-Cruz, Paul, and Sebastian, apologies and gratitude. Penguins are social animals. From time to time, killer whales orcas roam under the surface waiting for some prey. Penguins are aware of the danger and would like to have some information before taking a plunge.
So what is a penguin to do? Is it possible that no penguin will ever go? No, because waiting becomes more costly as hunger increases. Eventually, one or more penguins will take the plunge, and, depending on the outcome, the others will either stay put or follow en masse.
Christophe P. Chamley-Rational Herds_ Economic Models of Social Learning (2003).pdf
Recent, and remarkably late, evidence shows that the risk of defects for children is marginally higher in such marriages than in the general population Motulsky et al. Motulsky said. Motulsky said the American laws against cousin marriage should be abolished, because they are based in part on the mistaken belief that the children of such parents will suffer from terrible physical and mental illnesses.
White vans were pictured on wanted posters everywhere.
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So there was nothing but a white van and before that, a white box truck to look for. With no description of the killer, many people, gripped with fear of another attack and seizing on any detail in their personal lookout for the sniper, were in a kind of white-van haze. Umbrellas The actions of others convey some information about the state of the world. When I see other people going out with an umbrella, I take an umbrella along without checking the weather forecast. I do so because I know the decision model of others.
I can then infer their private information from their action without the need to talk to them. This herding is rational. There is, however, the possibility that everyone carries an umbrella because someone carries an umbrella. The herd may be wrong. The chapters are designed to study one issue at a time. The Tools All models will have a key random variable, which will not be observed directly: the state of nature. Rational learning in this book means Bayesian learning about the state of nature.
The essential tools of analysis are presented in Chapter 2. The private information is represented by private signals, which depend on the state of nature: for example, if it will rain if the sun will shine , two-thirds one-third of the agents think that rain is more likely than sunshine. To think that rain is more less likely is the real- ization of a private signal. These private signals are correct, statistically, and a large number of them, if they could be pooled directly, would bring perfect or near-perfect information. We will use restrictive models, which will be special cases.
In most cases, these results depend on some critical assumptions. It is therefore important to know the implications of the mod- eling choices. These two models are discussed in detail in Chapter 2. An agent observes a variable aggregate investment, success or failure of an oil drilling that depends on the state of nature. This rule is an application of the calculus of conditional probabilities, and it generates the remarkable property of a martin- gale: an agent knows that he may change his belief after an observation, but the expected value of the change is nil.
If that value were different from zero, the agent would change his belief right away. The martingale convergence theorem is one of the most beautiful theorems in probability theory. Its mechanism is presented here intuitively. The theorem is the most important one in Bayesian learning. It will apply in many models but not in all of them and facilitate the analysis of the limit properties of learning.
This private information, or private belief, is like an endowment.