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1992 · The Quarterly Journal of Economics

A Simple Model of Herd Behavior

Abhijit Banerjee

We analyze a sequential decision model in which each decision maker looks at the decisions made by previous decision makers in taking her own decision. This is rational for her because these other decision makers may have some information that is important for her. We then show that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. We then show that the resulting equilibrium is inefficient.

6,618 citations1 views
DOI: 10.2307/2118364
1991 · The Quarterly Journal of Economics

Loss Aversion in Riskless Choice: A Reference-Dependent Model

Amos Tversky, Daniel Kahneman

Much experimental evidence indicates that choice depends on the status quo or reference level: changes of reference point often lead to reversals of preference. We present a reference-dependent theory of consumer choice, which explains such effects by a deformation of indifference curves about the reference point. The central assumption of the theory is that losses and disadvantages have greater impact on preferences than gains and advantages. Implications of loss aversion for economic behavior are considered.

6,495 citations1 views
DOI: 10.2307/2937956
1955 · The Quarterly Journal of Economics

A BEHAVIORAL MODEL OF RATIONAL CHOICE

Herbert A. Simon

Introduction, 99. — I. Some general features of rational choice, 100.— II. The essential simplifications, 103. — III. Existence and uniqueness of solutions, 111. — IV. Further comments on dynamics, 113. — V. Conclusion, 114. — Appendix, 115.

15,461 citations2 views
DOI: 10.2307/1884852