CeDEx workshop - Anthony Ziegelmeyer (Queen's University Belfast)

Herding with Prosocial Preferences: Theory and Experimental Evidence

In simple economic models of observational learning, individuals are endowed with noisy private signals about an underlying state of Nature and they choose, in turn, one of several options after having observed all of their predecessors’ choices. If an individual’s payoff depends on the underlying state of Nature and her decision but is unaffected by the decisions of other individuals, rational herds emerge in which individuals ignore their private information and simply imitate their predecessor. Herding is commonly observed in economic experiments on observational learning but participants follow their predecessors far less than predicted. In fact, participants’ monetary payoffs are similar to the payoff from simple randomization in situations where it is empirically optimal to follow others.

We investigate both theoretically and experimentally whether the inflated tendency to follow private information reflects the participants’ attempt to achieve a desirable social outcome. Theoretically, we show that prosocial behaviour has the potential to aggregate more information and enhance social welfare. In a simple model of observational learning with prosocial preferences, there exists an equilibrium where individuals ignore the herd and choices convey private information. Experimentally, we strongly reject the hypothesis that prosocial motivation causes participants’ inflated tendency to follow private information. Our experimental evidence confirms that people tend to behave selfishly in the presence of information asymmetries.