Can herding improve investment decisions?

Authors


  • We thank David Martimort (the editor), two anonymous referees, Michael Brandt, Simon Gervais, Ron Kaniel, Manju Puri, Adriano Rampini, David Robinson, Lukas Schmid, Berk Sensoy, Matt Spiegel, S. Viswanathan, and seminar participants at Duke University for helpful discussions and comments. All errors are our own.

Abstract

Existing models show that herding in decisions can cause significant information loss, inferior information aggregation, and impaired decision making. However, we show that in a multistage decision setting with endogenous information production, herding on the initial decision can actually result in superior aggregate information and improved decisions. This is because the possibility of herding by a follower incentivizes the leader to increase its ex ante information production toan extent that it can dominate the information loss from herding. Examples include decisions to enter new markets, fund R&D, and provide early-stage venture capital.

Ancillary