Rational Observational Learning

An extensive literature identifies how privately-informed rational people who observe the behavior of other privately-informed rational people with similar tastes may come to imitate those people, emphasizing when and how such imitation leads to inefficiency. This paper investigates not the efficiency but instead the behavior of fully rational observational learners. In virtually any setting apart from that most commonly studied in the literature, rational observational learners imitate only some of their predecessors and, in fact, frequently contradict both their private information and the prevailing beliefs that they observe. In settings that allow players to extract all relevant information about others’ private signals from their actions, we identify necessary and sufficient conditions for rational observational learning to include “antiimitative” behavior, where, fixing other observed actions, a person regards a state of the world as less likely the more a predecessor’s action indicates belief in that state. ∗Eyster: Department of Economics, London School of Economics, Houghton Street, London WC2A 2AE United Kingdom, (email: [email protected]); Rabin: Department of Economics, University of California, Berkeley, 549 Evans Hall #3880, Berkeley, CA 94720-3880 USA, (email: [email protected]). The final examples of Section 2 originally appeared as a component of the paper entitled “Rational and Näıve Herding”, CEPR Discussion Paper DP7351. For valuable research assistance on this and the earlier paper, we thank Asaf Plan, Zack Grossman, and Xiaoyu Xia. We thank seminar participants at Berkeley, Columbia, Harvard, LSE, NYU, Pompeu Fabra, Sabanci, Toulouse, UBC and Yale for helpful comments. Rabin thanks the National Science Foundation (grants SES-0518758 and SES-0648659) for financial support.