Erschienen:
Cambridge, Mass: National Bureau of Economic Research, 2020
Erschienen in:NBER working paper series ; no. w27735
Umfang:
1 Online-Ressource; illustrations (black and white)
Sprache:
Englisch
DOI:
10.3386/w27735
Identifikator:
Reproduktionsnotiz:
Hardcopy version available to institutional subscribers
Entstehung:
Anmerkungen:
System requirements: Adobe [Acrobat] Reader required for PDF files
Mode of access: World Wide Web
Beschreibung:
Biased information about the payoffs received by others can drive innovation, risk-taking, and investment booms. We study this cultural phenomenon using a model based on two premises. The first premise is a tendency for large successes, and the actions that lead to them, to be more salient to onlookers than small successes or failures. The second premise is selection neglect - the failure of observers to adjust for biased observation. In our model, each firm in sequence chooses to adopt or to reject a project that has two possible payoffs, one positive and one negative. The probability of success is higher in the high state of the world than in the low state. Each firm observes the payoffs received by past adopters before making its decision, but there is a chance that an adopter's outcome will be censored, especially if the payoff was negative. Failure to account for biased censoring causes firms to become overly optimistic, leading to irrational booms in adoption. Booms may eventually collapse, or they may last forever. We describe these effects as a form of cultural evolution with adoption or rejection viewed as traits transmitted between firms. Evolution here is driven not only by differential copying of successful traits, but also by cognitive reasoning about which traits are more likely to succeed - quantified using the Price Equation to decompose the effects of mutation pressure and evolutionary selection. This account provides a new explanation for investment booms, merger and IPO waves, and waves of technological innovation