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Published online by Cambridge University Press: 12 January 2010
The triumph of hope over experience.
Social learning occurs through the observation of the outcomes of others' actions. Beliefs may fail to converge to the truth when these outcomes fail to be sufficiently informative. Various examples are analyzed: (i) a monopoly faces intersecting demand curves; (ii) the probability of economic success depends on effort through an unknown relation; (iii) the probability of success depends on more than one factor; (iv) private beliefs are bounded. There may be some relation between fiscal policies and the evolution of beliefs (which in turn may affect the policies). New agents with beliefs arbitrarily close to the truth can sway people away from an incorrect herd into an optimal action.
In the previous chapters, the information about the true state of nature came from private ex ante beliefs. This information was brought, imperfectly, into the social knowledge through the filter of the action choices by individuals pursuing their own interest. The implicit assumption was that the outcomes of actions would occur after all decisions were made. In some settings, however, actions bear lessons for future decisions. Firmsmay adjust their prices after the market response. Unemployed agents observe the results of their search. Farmers observe some results at the end of a crop cycle before making choices for the next one. Evidence on the risks of cousin marriages eventually becomes known. These settings share the commonfeature that actions send a random signal: chance plays a role in the finding of a new job; agricultural outputs are famously uncertain; the outcomes of medical treatments depend to a large extent on personal characteristics that cannot be observed.
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