Antonio Guarino | University College London (original) (raw)

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Papers by Antonio Guarino

Games, 2010

We study social learning in a large population of agents who only observe the actions taken by th... more We study social learning in a large population of agents who only observe the actions taken by their neighbours. Agents have to choose one, out of two, reversible actions, each optimal in one, out of two, unknown states of the world. Each agent chooses rationally, on the basis of private information and of the observation of his neighbours' actions. Agents can repeatedly update their choices at revision opportunities that they receive in a random sequential order. We show that if agents receive equally informative signals and observe both neighbours, then actions converge exponentially fast to a configuration where some agents are permanently wrong. In contrast, if agents are unequally informed (in that some agents receive a perfectly informative signal and others are uninformed) and observe one neighbour only, then everyone will eventually choose the correct action. Convergence, however, obtains very slowly, at rate √ t.

We study a simple dynamic model of social learning with local informational externalities. There ... more We study a simple dynamic model of social learning with local informational externalities. There is a large population of agents, who repeatedly have to choose one, out of two, reversible actions, each of which is optimal in one, out of two, unknown states of the world. Each agent chooses rationally, on the basis of private information (s)he receives by a symmetric binary signal on the state, as well as the observation of the action chosen among their nearest neighbours. Actions can be updated at revision opportunities that agents receive in a random sequential order. Strategies are stationary, in that they do not depend on time, nor on location. We show that: if agents receive equally informative signals, and observe both neighbours, then the social learning process is not adequate and the process of actions converges exponentially fast to a con…guration where some agents are permanently wrong; if agents are unequally informed, in that their signal is either fully informative or fully uninformative (both with positive probability), and observe one neighbour, then the social learning process is adequate and everybody will eventually choose the action that is correct given the state. Convergence, however, obtains very slowly, namely at rate p t: We relate the …ndings with the literature on social learning and discuss the property of e¢ ciency of the information transmission mechanism under local interaction.

SSRN Electronic Journal, 2003

We study the behavior of experimental subjects who have to make a sequence of risky investment de... more We study the behavior of experimental subjects who have to make a sequence of risky investment decisions in the presence of network externalities. Subjects follow a simple heuristic -investing after positive experiences and reducing their propensity to invest after a failure. This result contrasts with the theoretical findings of Jeitschko and Taylor (2001) in which even agents who have only good experiences eventually stop investing because they are afraid that others with worse experiences will quit. In theory, this "Bayesian fear" can trigger sudden economic collapse -even in the most efficient Bayesian equilibrium. In the experiment, subjects are surprisingly fearless of others' experiences, and simply follow their own experiences, thus averting a total collapse.

We study a sequential trading financial market where there are gains from trade, i.e., where info... more We study a sequential trading financial market where there are gains from trade, i.e., where informed traders have heterogeneous private values. We show that an informational cascade (i.e., a complete blockage of information) arises and prices fail to aggregate information dispersed among traders. During an informational cascade, all traders with the same preferences choose the same action, either following the market (herding) or going against it (contrarianism). We also study financial contagion by extending our model to a two-asset economy. We show that informational cascades in one market can be generated by informational spillovers from the other. Such spillovers have pathological consequences, generating long-lasting misalignments between prices and fundamentals.

American Economic Review, 2005

We study herd behavior in a laboratory financial market. Subjects receive private information on ... more We study herd behavior in a laboratory financial market. Subjects receive private information on the fundamental value of an asset and trade it in sequence with a market maker. The market maker updates the asset price according to the history of trades. Theory predicts that agents should never herd. Our experimental results are in line with this prediction. Nevertheless, we observe a phenomenon not accounted for by the theory. In some cases, subjects decide not to use their private information and choose not to trade. In other cases, they ignore their private information to trade against the market (contrarian behavior). (

Journal of Economic Behavior & Organization, 2008

We study a sequential trading financial market where there are gains from trade, i.e., where info... more We study a sequential trading financial market where there are gains from trade, i.e., where informed traders have heterogeneous private values. We show that an informational cascade (i.e., a complete blockage of information) arises and prices fail to aggregate information dispersed among traders. During an informational cascade, all traders with the same preferences choose the same action, either following the market (herding) or going against it (contrarianism). We also study financial contagion by extending our model to a two-asset economy. We show that informational cascades in one market can be generated by informational spillovers from the other. Such spillovers have pathological consequences, generating long-lasting misalignments between prices and fundamentals.

B E Journal of Theoretical Economics, 2008

We study a sequential trading financial market where there are gains from trade, that is, where i... more We study a sequential trading financial market where there are gains from trade, that is, where informed traders have heterogeneous private values. We show that an informational cascade (i.e., a complete blockage of information) arises and prices fail to aggregate information dispersed among traders. During an informational cascade, all traders with the same preferences choose the same action, following the market (herding) or going against it (contrarianism). We also study financial contagion by extending our model to a two-asset economy. We show that informational cascades in one market can be generated by informational spillovers from the other. Such spillovers have pathological consequences, generating long-lasting misalignments between prices and fundamentals. . We are indebted to our advisor, Douglas Gale, for his invaluable guidance. We also owe a special debt to Marco LiCalzi for a very careful reading of the paper. We thank show that, when there there is multidimensional uncertainty (i.e., uncertainty not only on the direction of a shock to the asset fundamental, but also on the existence of the shock itself), herd behavior can arise even in their framework. Their definition of herding, however, is not the standard one in the literature (see footnote 24). Even with multidimensional uncertainty, informational cascades cannot arise in their study (see their Proposition 2 and their comments at page 733). See also the considerations of

Games, 2010

We study social learning in a large population of agents who only observe the actions taken by th... more We study social learning in a large population of agents who only observe the actions taken by their neighbours. Agents have to choose one, out of two, reversible actions, each optimal in one, out of two, unknown states of the world. Each agent chooses rationally, on the basis of private information and of the observation of his neighbours' actions. Agents can repeatedly update their choices at revision opportunities that they receive in a random sequential order. We show that if agents receive equally informative signals and observe both neighbours, then actions converge exponentially fast to a configuration where some agents are permanently wrong. In contrast, if agents are unequally informed (in that some agents receive a perfectly informative signal and others are uninformed) and observe one neighbour only, then everyone will eventually choose the correct action. Convergence, however, obtains very slowly, at rate √ t.

We study a simple dynamic model of social learning with local informational externalities. There ... more We study a simple dynamic model of social learning with local informational externalities. There is a large population of agents, who repeatedly have to choose one, out of two, reversible actions, each of which is optimal in one, out of two, unknown states of the world. Each agent chooses rationally, on the basis of private information (s)he receives by a symmetric binary signal on the state, as well as the observation of the action chosen among their nearest neighbours. Actions can be updated at revision opportunities that agents receive in a random sequential order. Strategies are stationary, in that they do not depend on time, nor on location. We show that: if agents receive equally informative signals, and observe both neighbours, then the social learning process is not adequate and the process of actions converges exponentially fast to a con…guration where some agents are permanently wrong; if agents are unequally informed, in that their signal is either fully informative or fully uninformative (both with positive probability), and observe one neighbour, then the social learning process is adequate and everybody will eventually choose the action that is correct given the state. Convergence, however, obtains very slowly, namely at rate p t: We relate the …ndings with the literature on social learning and discuss the property of e¢ ciency of the information transmission mechanism under local interaction.

SSRN Electronic Journal, 2003

We study the behavior of experimental subjects who have to make a sequence of risky investment de... more We study the behavior of experimental subjects who have to make a sequence of risky investment decisions in the presence of network externalities. Subjects follow a simple heuristic -investing after positive experiences and reducing their propensity to invest after a failure. This result contrasts with the theoretical findings of Jeitschko and Taylor (2001) in which even agents who have only good experiences eventually stop investing because they are afraid that others with worse experiences will quit. In theory, this "Bayesian fear" can trigger sudden economic collapse -even in the most efficient Bayesian equilibrium. In the experiment, subjects are surprisingly fearless of others' experiences, and simply follow their own experiences, thus averting a total collapse.

We study a sequential trading financial market where there are gains from trade, i.e., where info... more We study a sequential trading financial market where there are gains from trade, i.e., where informed traders have heterogeneous private values. We show that an informational cascade (i.e., a complete blockage of information) arises and prices fail to aggregate information dispersed among traders. During an informational cascade, all traders with the same preferences choose the same action, either following the market (herding) or going against it (contrarianism). We also study financial contagion by extending our model to a two-asset economy. We show that informational cascades in one market can be generated by informational spillovers from the other. Such spillovers have pathological consequences, generating long-lasting misalignments between prices and fundamentals.

American Economic Review, 2005

We study herd behavior in a laboratory financial market. Subjects receive private information on ... more We study herd behavior in a laboratory financial market. Subjects receive private information on the fundamental value of an asset and trade it in sequence with a market maker. The market maker updates the asset price according to the history of trades. Theory predicts that agents should never herd. Our experimental results are in line with this prediction. Nevertheless, we observe a phenomenon not accounted for by the theory. In some cases, subjects decide not to use their private information and choose not to trade. In other cases, they ignore their private information to trade against the market (contrarian behavior). (

Journal of Economic Behavior & Organization, 2008

We study a sequential trading financial market where there are gains from trade, i.e., where info... more We study a sequential trading financial market where there are gains from trade, i.e., where informed traders have heterogeneous private values. We show that an informational cascade (i.e., a complete blockage of information) arises and prices fail to aggregate information dispersed among traders. During an informational cascade, all traders with the same preferences choose the same action, either following the market (herding) or going against it (contrarianism). We also study financial contagion by extending our model to a two-asset economy. We show that informational cascades in one market can be generated by informational spillovers from the other. Such spillovers have pathological consequences, generating long-lasting misalignments between prices and fundamentals.

B E Journal of Theoretical Economics, 2008

We study a sequential trading financial market where there are gains from trade, that is, where i... more We study a sequential trading financial market where there are gains from trade, that is, where informed traders have heterogeneous private values. We show that an informational cascade (i.e., a complete blockage of information) arises and prices fail to aggregate information dispersed among traders. During an informational cascade, all traders with the same preferences choose the same action, following the market (herding) or going against it (contrarianism). We also study financial contagion by extending our model to a two-asset economy. We show that informational cascades in one market can be generated by informational spillovers from the other. Such spillovers have pathological consequences, generating long-lasting misalignments between prices and fundamentals. . We are indebted to our advisor, Douglas Gale, for his invaluable guidance. We also owe a special debt to Marco LiCalzi for a very careful reading of the paper. We thank show that, when there there is multidimensional uncertainty (i.e., uncertainty not only on the direction of a shock to the asset fundamental, but also on the existence of the shock itself), herd behavior can arise even in their framework. Their definition of herding, however, is not the standard one in the literature (see footnote 24). Even with multidimensional uncertainty, informational cascades cannot arise in their study (see their Proposition 2 and their comments at page 733). See also the considerations of