Social Learning from Private Experiences: The Dynamics of the Selection Problem

I analyse social interactions that stem from the successive endeavours of new cohorts of heterogeneous decision makers to learn from the experiences of past cohorts. A dynamic process of information accumulation and decision making occurs as the members of each cohort observe the experiences of earlier ones, and then make choices that yield experiences observable by future cohorts. Decision makers face the "selection problem" as they seek to learn from observation of past actions and outcomes, while not observing the counterfactual outcomes that would have occurred had other actions been chosen. Assuming that all cohorts face the same outcome distributions, I show that social learning is a process of sequential reduction in ambiguity. The specific nature of this process, and its terminal state, depend critically on how decision makers make choices under ambiguity. I use the problem of learning about innovations to illustrate. Copyright The Review of Economic Studies Limited, 2004.