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 formbeliefs about their own and others’ quality of information by tying the accuracy of their signal to their score on a trivia quiz. Their beliefs about 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 manifesting in their behavior of breaking herds. First, subjects that exhibit more confidence about their relative quiz performance are more likely to follow their signal than the herd. Second, subjects that realize their absolute performance is better than expected are also more likely to follow their signal. The relative overconfident subjects are more likely to benefit from following their signals in easy quizzes, while absolute underconfident subjects are more likely to benefit in hard quizzes after scores are revealed. These findings can be partially 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

Economist, Bates White Economic Consulting

I am an Economist at Bates White Economic Consulting. I received my PhD in Economics from The Ohio State University.