Word-of-mouth communication and social learning
| Authors | Ellison, Fudenberg |
| Journal | Quarterly Journal of Economics |
| Year | 1995 |
| Type | Published Paper |
| Abstract | This paper studies the way that word-of-mouth communication aggregates the information of individual agents. We find that the structure of the communication process determines whether all agents end up making identical choices, with less communication making this conformity more likely. Despite the players' naive decision rules and the stochastic decision environment, word-of-mouth communication may lead all players to adopt the action that is on average superior. These socially efficient outcomes tend to occur when each agent samples only a few others. |
| URL | https://doi.org/10.2307/2118512 |
| Tags | Theory |
A theory of conformity
| Authors | Bernheim |
| Journal | Journal of Political Economy |
| Year | 1994 |
| Type | Published Paper |
| Abstract | This paper analyzes a model of social interaction in which individuals care about status as well as "intrinsic" utility (which refers to utility derived directly from consumption). Status is assumed to depend on public perceptions about an individual's predispositions rather than on the individual's actions. However, since predispositions are unobservable, actions signal predispositions and therefore affect status. When status is sufficiently important relative to intrinsic utility, many individuals conform to a single, homogeneous standard of behavior, despite heterogeneous underlying preferences. They are willing to conform because they recognize that even small departures from the social norm will seriously impair their status. The fact that society harshly censures all nonconformists is not simply assumed (indeed, status varies smoothly with perceived type); rather, it is produced endogenously. Despite this penalty, agents with sufficiently extreme preferences refuse to conform. The model provides an explanation for the fact that standards of behavior govern some activities but do not govern others. It also suggests a theory of how standards of behavior might evolve in response to changes in the distribution of intrinsic preferences. In particular, for some values of the preference parameters, norms are both persistent and widely followed; for other values, norms are transitory and confined to small groups. Thus the model produces both customs and fads. Finally, an extension of the model suggests an explanation for the development of multiple subcultures, each with its own distinct norm. |
| URL | https://www.jstor.org/stable/2138650 |
| Tags | Theory |
A simple model of herd behavior
| Authors | Banerjee |
| Journal | Quarterly Journal of Economics |
| Year | 1992 |
| Type | Published Paper |
| Abstract | We analyze a sequential decision model in which each decision maker looks at the decisions made by previous decision makers in taking her own decision. This is rational for her because these other decision makers may have some information that is important for her. We then show that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. We then show that the resulting equilibrium is inefficient. |
| URL | https://doi.org/10.2307/2118364 |
| Tags | Theory |
A theory of fads, fashion, custom, and cultural change as informational cascades
| Authors | Bikhchandani, Hirshleifer, Welch |
| Journal | Journal of Political Economy |
| Year | 1992 |
| Type | Published Paper |
| Abstract | An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades. |
| URL | https://www.jstor.org/stable/2138632 |
| Tags | Theory |
Asset prices under habit formation and catching up with the joneses
| Authors | Abel |
| Journal | American Economic Review |
| Year | 1990 |
| Type | Published Paper |
| Abstract | This paper introduces a utility function that nests three classes of utility functions: 1) time-separable utility functions; 2) "catching up with the Joneses" utility functions that depend on the consumer's level of consumption relative to the lagged cross-sectional average level of consumption; and 3) utility functions that display habit formation. Incorporating this utility function into a Lucas (1978) asset pricing model allows calculation of closed-form solutions for the prices of stocks, bills and consols under the assumption that consumption growth is i.i.d. Then equilibrium asset prices are used to examine the equity premium puzzle. |
| URL | https://www.jstor.org/stable/2006539 |
| Tags | Theory |
Stock prices and social dynamics
| Authors | Shiller, Fischer, Friedman |
| Journal | Brookings papers on economic activity |
| Year | 1984 |
| Type | Published Paper |
| Keywords | Social movements, social psychology, group pressure, fashions, fads, stock prices |
| URL | https://www.jstor.org/stable/2534436 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Theory |