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A Simple Model of Herd Behavior

Abhijit V. Banerjee
The Quarterly Journal of Economics
Vol. 107, No. 3 (Aug., 1992), pp. 797-817
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2118364
Page Count: 21
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A Simple Model of Herd Behavior
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Abstract

We analyze a sequential decision model in which each decision maker looks at the decisions made by previous decision makers in taking her own decision. This is rational for her because these other decision makers may have some information that is important for her. We then show that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. We then show that the resulting equilibrium is inefficient.

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