The next step is looking when A should invest. He therefore need to determine given a certain signal what is the probability of a high state (or low state)? We have the use bayes rule to calculate this.
Discussion: Herd Behavior and Investment by Scharfstein and Stein (2)
In this second post we will make a start with the model that Sharfstein and Stein made in their paper Herd Behavior and Investment.
Discussion: Herd Behavior and Investment by Scharfstein and Stein (1)
In a serie of posts I will discuss the paper of Scharfstein and Stein called “Herd Behavior and Investment” from 1990. It can be found here. http://scholar.google.com indicates that to this day this paper is cited 1708 times, quite a number. I will try to explain the paper as best as I can. The paper examines some of the forces that can lead to herd behaviour in investments. Although this is inefficient behaviour from a social standpoint, it can be rational from the perspective of the managers who are concerned about their reputation.
The model is a game theoretical model that falls under the category of dynamic games of imperfect information. In other words, the players in the game move sequentially (one after the other) and have imperfect information about the possible outcomes.
To understand this paper and post you will need to be familiar with Bayes rule. This post will mostly be an introduction. In subsequent post the model will be introduced and solved.
Economics of Education: two stylised facts about teachers
Education is another area economist are active in. From the wide range of studies we can formulate (atleast) two stylised facts. A stylised fact is a ‘simplified presentation’ of an empirical finding . It is a finding that is supported by (almost) everyone. For teachers we can formulate the two following stylised facts.
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