To follow the Herd or break away? Overconfidence and Social Learning

Abstract

We study the effects of overconfidence in a sequential social learning setting. In a lab experiment, we let subjects form beliefs about their own and others’ information by tying the accuracy of their signal to their score on a trivia quiz. Their beliefs on the expected scores allow us to measure and study the effects of confidence on social learning. Our results show that there are two distinct effects of confidence that manifest in their behavior of breaking herds. First, environments that promote relative overconfidence increase the occurrence of herd breaks. Second, environments that promote absolute underconfidence increase herd breaks after subjects realize their true performance. Both cases lead to a welfare improvement compared to their opposite environment. These findings can be explained by a model of social learning where rational agents have information structures that induce overconfidence about their relative signal accuracy.

(Joint with Jason Tayawa)

Mir Adnan Mahmood

PhD Candidate, Department of Economics

I am an experimental economist who uses lab experiments to investigate behavior in social and strategic settings.