Econometrica: Mar, 2000, Volume 68, Issue 2
Pathological Outcomes of Observational Learning
Lones Smith, Peter Sørensen
This paper explores how Bayes‐rational individuals learn sequentially from the discrete actions of others. Unlike earlier informational herding papers, we admit heterogeneous preferences. Not only may type‐specific ‘herds’ eventually arise, but a new robust possibility emerges: . Beliefs may converge to a limit point where history offers no decisive lessons for anyone, and each type's actions forever nontrivially split between two actions. To verify that our identified limit outcomes do arise, we exploit the Markov‐martingale character of beliefs. Learning dynamics are stochastically stable near a fixed point in many Bayesian learning models like this one.