: Rational Herds: Economic Models of Social Learning: Christophe P. Chamley. The book shows how these pathologies may occur in a society of rational Rational Herds: Economic Models of Social Learning Christophe Chamley. implementation of the herd behavior theory to the financial markets is introduced and it is .. recommend to read Chamley’s () book of Rational Herds.

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Social learning involves individuals learning from the behavior of others and may lead to spectacular outcomes such as herding, fads, frenzies, crashes, and booms. Providing a synthesis of the theoretical literature of the last ten years, Christophe Chamley demonstrates how these pathologies may occur in a society of rational individuals. His book provides informal as well as technical analyses for readers interested in social behavior, and more advanced researchers in ratoinal, finance, and other social sciences.

A key feature is the inclusion of exercises in each chapter, with proofs written out for students. The beautiful and extraordinarily important hcamley Rational Herds: Economic Models of Social Learning by Christophe Chamley treats topics important to decision-makers in life and markets, including how fast, delayed and divergent our learning is, herding, the convergence of beliefs, booms, bubbles and crashes, ratiional into business, diffusion of innovations, investments in knowledge, searching costs, the cost of information, the value of isolation versus joining e.

Rational herds : economic models of social learning – EconBiz

Each chapter starts out with examples of social learning, simple models that illumine how rational agents might act in comparable situations, and extensions into more realistic and technical models that apply to special cases considered in the literature.

The more familiar the reader is with probability theory, simulations, economics of utility, and normal distribution theory, the easier it will be for him to gain knowledge from the book, but a hard-working layman with a pencil and paper can gain insights into many fruitful areas even without this background. The book begins with an example of social learning among penguins typical of its many suggestive examples rtional market decision-makers. The penguins, after much hard winter work without food, move in a group to the edge of a cliff overlooking an ocean full of food.


Possibly lurking in the water are killer rstional, whales and seals. The penguins as a group would be much better served if one of them would test the waters. gerds

But for the individual penguin, death might result. Action must be taken or else they’ll all starve to death.

Rational herds : economic models of social learning

The penguins solve the problem by pushing a particularly vigorous individual off the cliff. If he survives, they all jump in.

Comparable situations occur whenever danger or discomfort threatens a group and the first person to test the water might risk harm or, worse yet, social disapproval for being a non-conformist. We all face this, for example, when we see a fight and know that we can break it up if only group action can be taken, or when we are in a crowded room where the heating or ventilation isn’t proper, or when we’re in an establishment where the service is poor. We face this in the market when we have to test gerds waters before a trend is set, before an announcement has been released, before a new industry or market has come into favor, or before a change in interest rates has occurred.

The chamleey will help you decide how long to wait in such situations, and to analyze the attempts of others to substitute for you or coordinate with you.

Rational Herds

Many of the basic models in the book start with binary choices such as the identification of a taxi as red or yellow, or the prediction rwtional a market move as up or down. Consider the following situation: Now, a study is made, e. Now there are two likelihoods that can result: But despite the forecast based on interest rates, the correct prediction is still for a rise.


No change in decision will be forthcoming. But now, suppose that a second study is made, and it also predicts a decline. Everyone who followed such a decision strategy, or learned of the studies, or believed that others were acting on the basis of correct decision-making, would follow the third forecast and change his action to selling Thus, depending on the delay and decisiveness of action, an avalanche, cascade or crash might occur.

There are hundreds of fascinating examples of group decision making given in Chamley’s excellent book that will illuminate all your thinking about social behavior.

Some of my favorites involve studies of the value of conformity, when to go out in the rain, when to get out of a booming market, when to follow an expert, the value of the risky market order or the conforming limit order, the value of experience old-timers versus beginnerswhen to attack a currency, how much credibility to place on initial reports the white van problemthe accuracy of group behavior, when it pays to coordinate or go it alone.

Rational herds : economic models of social learning / Christophe P. Chamley – Details – Trove

The book will change the way you think about groups and will have you rereading to to better appreciate these key areas. Link to Daily Speculations’ Review. Business Cycles Central Banks. Creative Destruction Credit Crunch. Gloom and Doom Gold.

Sovereign Bonds Systemic Risk. Tipping Point Trade Balance. Investment Office Selecting relevant market observations.

Quotes on the Fly. Investment Thoughts – Beyond Finance. From the Publisher Social learning involves individuals learning from the behavior of others and may lead to spectacular outcomes such as herding, fads, frenzies, crashes, and booms.