How Overconfidence Influences the Herding Behavior in a Modified Information Cascade Game

Abstract

Humans are social animals. In everyday life, people rarely make important decisions solely based on their personal opinions. Most human decisions are made in a social context. People seek help from relatives, peers, experts, and more to make decisions. To mimic this fact, Anderson and Holt (1997) devised an experiment design, the information cascade game, in which players guess the actual state of the world based on their private signals and others’ prior choices. On another side of the picture, Michailova (2010) defines overconfidence as the act of a person overestimating his or her skill, knowledge, and precision of information. According to Camerer and Lovallo (1999), subjects exhibit overconfidence when placing bets on their relative performance. In this experiment, the baseline treatment of the information cascade game is modified so that subjects’ overconfidence actively participates in subjects’ guesses about the actual state of the world. Under this modified experiment design, subjects’ confidence level is negatively correlated with the herding frequency.