This paper examines the occurrence and fragility of information cascades in two laboratory experiments. One group of low informed participants sequentially guess which of two states has been randomly chosen. In a matched pairs design, another group of high informed participants make similar guesses after having observed the guesses of the low informed participants. In the second experiment, participants' beliefs about the chosen state are elicited. In equilibrium, low informed players who observe an established pattern of identical guesses herd without regard to their private information whereas high informed players always guess according to their private information. Equilibrium behavior implies that information cascades emerge in the group of low informed participants, the belief based solely on cascade guesses is stationary, and information cascades are systematically broken by high informed participants endowed with private information contradicting the cascade guesses. Experimental results show that the behavior of low informed participants is qualitatively in line with the equilibrium prediction. Information cascades often emerge in our experiments. The tendency of low informed participants to engage in cascade behavior increases with the number of identical guesses. Our main finding is that information cascades are not fragile. The behavior of high informed participants differs markedly from the equilibrium prediction. Only one-third of laboratory cascades are broken by high informed participants endowed with private information contradicting the cascade guesses. The relative frequency of cascade breaks is 15% for the situations where five or more identical guesses are observed. Participants' elicited beliefs are strongly consistent with their own behavior and show that, unlike in equilibrium, the more cascade guesses participants observe the more they believe in the state favored by those guesses.
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Acknowledgements The authors have benefited from comments and suggestions from Mohammed Ab-dellaoui, Nick Feltovich, John Hey, Dorothea Kübler, Bradley Ruffle, Georg Weizsäcker, Marc Willinger, participants at F.U.R. X in Torino, 5ièmes Journées d’Economie Expérimentale in Strasbourg, and seminars in Ben Gurion University, University College London, Hebrew University of Jerusalem, University of Edinburgh, and Rice University. We are indebted for the financial support provided by the Department of Economics at the University of Strasbourg. The editor, Jordi Brandts, and two anonymous referees provided remarks that improved the manuscript.
- Depth-of-reasoning analysis
- Elicited beliefs
- Experimental economics
- Information cascades