Information Cascades with Informative Ratings: An Experimental Test

Date: 2016-05
By: Paul J. Healy (Department of Economics, Ohio State University)
John Conlon (Department of Economics, Ohio State University)
Yeochang Yoon (Department of Economics, Ohio State University)
We study behavior in an information cascades setting where previous buyers of the product leave noisy but informative ratings of the product. Although this increases the amount of public information available, Yoon (2015, working paper) shows that ratings can actually increase the frequency of cascades in which buyers do not purchase even though the product is of high quality. This occurs because non-buyers do not leave ratings. Although we find some evidence roughly in line with the theory, those results are swamped by a strong tendency for subjects to purchase even when public information suggests they should not.
Keywords: Information Cascades; Herding; Activity Bias
JEL: D83 C92 D03