Payoff Effects in Information Cascade Experiments

A question in problem set 5 describes an experiment involving information cascades. Subjects were paid if they can guess correctly whether an urn contain more black balls or more red balls; and they were given a private

signal of a draw of a ball from the urn and the guess of all the previous subject. An information cascade does in fact occur in this setting, and its effects is explored in Anderson’s paper.

Anderson’s expriment is identical to the one described in our problem, with number of subjects equal to 6 conducted over 9 sessions. The subjects’ behavior is not always consistent with our cascade model discribed in class. Some of the subjects’ decisions are inconsistent with Bayes’ rule; that is, they sometimes choose to ignore the plausible guess based on the guesses of previous subjects and even their own private signals. The experiment’s data also shows that an incorrect cascade can occur sometimes given the right (or wrong, depending on your point of view) conditions. Although having a non-zero payoff to guessing the correct urn decreases the decision error of subjects, increasing the payoff (when it is already non-zero) has no significant effect.