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After the FloodHow the Great Recession Changed Economic Thought$
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Edward L. Glaeser, Tano Santos, and E. Glen Weyl

Print publication date: 2017

Print ISBN-13: 9780226443546

Published to Chicago Scholarship Online: September 2017

DOI: 10.7208/chicago/9780226443683.001.0001

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Social Learning, Credulous Bayesians, and Aggregation Reversals

Social Learning, Credulous Bayesians, and Aggregation Reversals

(p.243) Chapter Eight Social Learning, Credulous Bayesians, and Aggregation Reversals
After the Flood

Edward L. Glaeser

Bruce Sacerdote

University of Chicago Press

The dot-com bubble, the great housing market convulsion of 2000-2007 and the associated crash in the value of mortgage-backed securities left many observers convinced that investors were less than rational. One simple alternative to perfect rationality is that individuals are “Credulous Bayesians,” who overweight the opinions of others because they underestimate the role of shared sources of information. Credulous Bayesianism can readily generate the excess asset price volatility seen in asset price variations, and other predictions that this paper explores. Underestimating the size of shared errors also implies a failure to correct fully for the connection between past experience and information, which can explain why observable characteristics correlate with many beliefs. Credulous Bayesianism can also predict social multipliers, and the even more puzzling phenomenon of aggregation reversals, when an individual-level relationship has the opposite sign of an aggregate relationship.

Keywords:   social multipliers, peer effects, Bayesian beliefs, excess volatility, asset bubbles

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