Phase coexistence in a forecasting game
Curty, Philippe and Marsili, Matteo (2008) Phase coexistence in a forecasting game. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. Warwick Business School, Financial Econometrics Research Centre (No.05-).
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Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...
Individual choices are either based on personal experience or on information provided by peers. The latter case, causes individuals to conform to the majority in their neighborhood. Such herding behavior may be very efficient in aggregating disperse private information, thereby revealing the optimal choice. However if the majority relies on herding, this mechanism may dramatically fail to aggregate correctly the information, causing the majority adopting the wrong choice. We address these issues in a simple model of interacting agents who aim at giving a correct forecast of a public variable, either seeking private information or resorting to herding. As the fraction of herders increases, the model features a phase transition beyond which a state where most agents make the correct forecast coexists with one where most of them are wrong. Simple strategic considerations suggest that indeed such a system of agents self-organizes deep in the coexistence region. There, agents tend to agree much more among themselves than with what they aim at forecasting, as found in recent empirical studies.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School
|Library of Congress Subject Headings (LCSH):||Economic forecasting, Information behavior, Decision making -- Mathematical models|
|Series Name:||Warwick Business School, Financial Econometrics Research Centre|
|Publisher:||Warwick Business School, Financial Econometrics Research Centre|
|Place of Publication:||Coventry|
|Official Date:||2 February 2008|
|Number of Pages:||10|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
Original version 17 February 2006; this version dated 2 February 2008
 S. Bikhchandani, D. Hirshleifer and I. Welch, J. Pol.
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