Self-correcting Information Cascades 1 Jacob K. Goeree, Thomas R. Palfrey, Brian W. Rogers, and Richard D. McKelvey 2 April 19, 2006 Abstract We report experimental results from long sequences of decisions in environments that are theo- retically prone to severe information cascades. Observed behavior is much different—information cascades are ephemeral. We study the implications of a model based on quantal response equi- librium, in which the observed cascade formation/collapse/formation cycles arise as equilib- rium phenomena. Consecutive cascades may reverse states and usually such a reversal is self- correcting: the cascade switches to the correct state. We extend the model to allow for base rate neglect and find strong evidence for over-weighting of private information. The estimated belief trajectories indicate fast and efficient learning dynamics. JEL classification numbers : C92, D82, D83 Key words : social learning, information cascades, laboratory experiments 1 Financial support from the National Science Foundation (SBR-0098400 and SES-0079301) and the Alfred P. Sloan Foundation is gratefully acknowledged. The theory and experimental design was partially completed, and pilot experiments were conducted in collaboration with Richard McKelvey, who died in April 2002. He is not responsible for any errors in the paper. We acknowledge helpful comments from Bo˘gacen C ¸elen, Terry Sovinsky, three anonymous referees, the managing editor, seminar participants at GREQAM, Harvard University, Johns Hopkins University, NYU, Penn State University, Princeton University, UCLA, Universitat Autonoma de Barcelona, University of Edinburgh, Washington University, the 2003 annual meeting of ESA in Pittsburgh, the 2003 Malaga Workshop on Social Choice and Welfare Economics, the 2003 SAET meetings in Rhodos, the 2003 ESSET meetings in Gerzensee, the 2004 PIER conference on Political Economy, and the 2004 Summer Festival on Game Theory at Stony Brook. 2 Palfrey, Department of Economics, Princeton University, Princeton, NJ 08544 tpalfrey@princeton.edu. Go- eree and Rogers: Division of Humanities and Social Sciences, California Institute of Technology, Mail code 228-77, Pasadena, CA 91125, USA. McKelvey: Deceased.