Informational Herding, Optimal Experimentation, and Contrarianism

Lones Smith, Peter Norman Sørensen*, Jianrong Tian

*Corresponding author for this work

    Research output: Contribution to journalJournal articleResearchpeer-review


    In the standard herding model, privately informed individuals sequentially see prior actions and then act. An identical action herd eventually starts and public beliefs tend to “cascade sets” where social learning stops. What behaviour is socially efficient when actions ignore informational externalities? We characterize the outcome that maximizes the discounted sum of utilities. Our four key findings are: (1) cascade sets shrink but do not vanish, and herding should occur but less readily as greater weight is attached to posterity. (2) An optimal mechanism rewards individuals mimicked by their successor. (3) Cascades cannot start after period one under a signal log-concavity condition. (4) Given this condition, efficient behaviour is contrarian, leaning against the myopically more popular actions in every period. We make two technical contributions: as value functions with learning are not smooth, we use monotone comparative statics under uncertainty to deduce optimal dynamic behaviour. We also adapt dynamic pivot mechanisms to Bayesian learning.
    Original languageEnglish
    JournalReview of Economic Studies
    Issue number5
    Pages (from-to)2527-2554
    Number of pages28
    Publication statusPublished - Oct 2021


    • Herding
    • Mimicking
    • Contrarian
    • Cascade
    • Efficiency
    • Monotonicity
    • Logconcavity

    Cite this