Michael Rapp (Australian National University)

“Instability of Informed Coordination”

(Note: the seminar is on Tuesday)

Abstract

When agents use observational learning to learn about the fundamentals of a coordination game, there are multiple equilibria. In some equilibria information is efficiently transmitted through observational learning, while in others private information is disregarded entirely. Investigating the stability of these equilibria in a stochastic evolutionary model, I find that only equilibria where agents disregard private information are stochastically stable. Effectively, observational learning causes an extreme form of herding.
The source of instability in the informed equilibria comes through the way observational learning causes a correlation across actions. Due to heterogeneity in information quality, and the efficiency of information transmission in observational learning, most people rely on the actions of others to inform their decisions. Inevitably, agents copy uninformed trembles amplifying their impact.