Behaviors and
opinions of single individuals may be influenced by the dynamics operating
within the groups where they interact. Likely, this influence is stronger when
uncertainty characterizes the decisional stage [1]. The conformity to common behaviors has been explained originally in ethology by the selfish
herd theory as an attempt to reduce the predation risk [2]. In human environment, the herd
behaviors may take place in several situations and may affect deeply large
groups of population. This is the case, for example, of the so called boom and
bust phases in the stock markets. An explanation of the molding of a common
decision (or opinion) within the financial markets has been given by the thought contagion theories, whereby
single investors decide their operations by following the trend of the market.
Thought contagion theories arose from the studies on epidemiological diffusion
of pathologies within a population [3] and then they
have been adapted to analyze the transmission of beliefs and information flows
in the stock markets [4-6]. Propagation
of the thought contagion would rely on three factors [4]: 1)
transmission rate of beliefs/opinions; 2) receptiveness and 3) duration. The
transmission rate measures how freely and frequently the subjects share their
own belief/opinion or act coherently to their belief/opinion so as their
behaviors become an information. Receptiveness indicates how likely subjects
who originally do not have a certain belief/opinion, are then disposed to
follow it, that is, the openness to new ideas. Duration denotes how long those
who have a certain belief/opinion keep on transmitting this information to the
others. The thought contagion speeds up the spreading of decision/opinion among
the members of that group. In some sense, the herd behavior by leading to a
common decision/opinion in a group contributes to improve the efficiency of the
information flow. Both under ideal conditions and under conditions of
uncertainty, the conformity to the common behavior may result as rational. In
the ideal condition, where no one retains privileged information and all the
possible information is made available to the whole group (in the context of
financial markets this condition corresponds to the realization of the strong hypothesis of market efficiency
as defined in the theory of efficient market [7]), following the
information cascade is a rational strategy because given that everybody shares
the same information, then it is unlikely for a single to outperform the common
decision (e.g., the market trend).
In sequential DM, where the subjects are informed about the final decisions taken by their predecessors, the subjects
tend to imitate the former choices by elaborating the probability of success of
the flow of available information. This leads to a reasonable convergence of
preferences and to herding behavior [8-10]. The conformity to this common preference takes
place if an information cascade has
been recognized. That is, when the subjects, after having observed the actions of their predecessors, converge
to the same choice that the others have made, independently of their own
private information signals. Following a cascade means that people discard
their own information in favor of deductions based on earlier people’s
decisions [11].
The analysis of the capability
of the subjects to exploit the whole information set in order to take their decision
upon a relatively complex problem emerges as a relevant topic within the
decision theory.
Under condition of uncertainty, i.e., in
conditions of limited information, provided that the imitation of the others’
behavior is not mindless but relies on the bayesian approach, the herd behavior
arises from rational inferences [12].
Predictions about the event are made sequentially and the very first decisions
in the chain tend to reveal the private signals that are highly informative. In
this sense the conformity to the initial pattern of decisions (even though in
conflict with the hint that the private signal gives) makes the behavior of the followers as rational [13-15].
•Herding behavior: under certain conditions, it is rational for an individual to follow the crowd even if the individual’s own information suggests an alternative choice
Since to adhere to the information cascade originates from Bayesian induction, this strategy is considered to be rational. Deviations from the information cascade gives rise to the so-called overconfidence effect, for which under certain conditions, the decisions in a sequential decision making would be otherwise determined by private information.
On the contrary, this
mechanism for the transmission of beliefs and opinions is expected to introduce
some biases or even irrationality (e.g., in the fixing of stock prices) when
not all the three conditions above mentioned are fulfilled. This may occur if:
a) one or few subjects still retain privileged information by the effect of
time lags or breakdown in the transmission; b) information is incomplete,
unfounded or fake; c) there exists receptivity
viscosity.
On the characteristics of
the latter has been focused this work. Deviations from the information cascade
are classified as overconfident.
Therefore, the overconfidence effect
occurs when subjects do not switch from their private information signals to
the common decision because they value that their own judgment outweighs the
others’ one.
It is usually reported in literature the paradigm of inverse
relation between overconfidence and accuracy: to the high confidence to one’s
own judgement would not correspond high accuracy of the results. That is,
self-assessment of accuracy in the cognitive domain produces overconfidence [15]. This inaccurate judgment (that may be also
associated to perceptual distortion or illogical interpretations of facts/data)
then would give rise to a cognitive bias which is called irrationality [16,17]. As
consequence, the overconfidence has been
associated to irrational decisional process and to negative implications (also
in a wide scale), which make the study on this effect a relevant topic in
neuroeconomics.
However, some experimental results suggest different keys to
interpretation of overconfidence. In fact,
performances in the overconfident group were found similar to the ones obtained
from analytical (i.e., rational) tasks. Maybe the deviations from the cascade
reveal that under some circumstances subjects have difficulty with recognizing
the additional information provided by the public sequential decisions.
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