Taking the Road Less Traveled by: Does Conversation Eradicate Pernicious Cascades?
Henry Cao, Bing Han, and David Hirshleifer
Journal of Economic Theory, July 2011
We offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads, despite being able to communicate both past payoff outcomes and the private signals underlying past choices. This reflects direct and indirect action-based informational externalities; and conversational externalities – the failure of individuals to take into account the benefits their conversations confer upon later individuals. In contrast with previous cascades literature, cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever. Furthermore, the ability of individuals to communicate can reduce average decision accuracy and welfare.