10 - Words

Summary

If we all think alike, it means we do not think anymore.

Trust but verify.

In this chapter, the actions of agents (experts) are words (messages). The payoff depends on the message and some independent information of the receiver of the message. The condition for no herding and telling the truth is the same as in the BHW model of Chapter 4. In some cases, the payoff depends on a reputation for being informed or for being nonmanipulative. An expanded set of messages may not improve the transmission of information (contrary to Chapter 4). If the expert has information on the independent information of the receiver, the receiver should try to increase his information. The order in which experts should speak in a panel (trial jury) is analyzed: the antiseniority rule does not seem to be superior to other rules.

Communication with words is the subject of a vast literature. This chapter will be selective and focus on the relations between models of communication through words (models of “cheap talk”) and the issues of social learning that are addressed in other parts of this book. For example, herding may arise in financial markets because of the observation of others' actions or because of the behavior of financial advisors who are influenced by others' predictions. We will see that herding on actions and herding on words occur under similar conditions.

In the generic setting, an agent is an expert with private information on the state of nature, and his action takes the form of a message that is sent to a receiver. How can he transmit his information credibly by mere words?