Simple models and welfare effects of herd behavior
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School of Business | Bachelor's thesis
AbstractThis literature review examines properties of two basic models of herd behavior and drafts some welfare effects of herding. It introduces two simple models written in 1992; model by Banerjee and model by Bickhchandani et al. These models started the research of herd behavior in its current form and have been basis of several publications related on herd behavior since. This thesis examines the properties and limitations of simple formation of these models. Although the two models are capable of producing intuitive and robust results, they make several simplifying assumptions and departures from reality. Since both models assume uniform and constant payoff for each individual, introducing more complex ways of measuring welfare would make models more realistic. However, literature about welfare properties of herd behavior is currently almost non-existing.
Thesis advisorMustonen, Mikko
herd, behavior, cascade, welfare