It is important to understand crowd and group dynamics in order to understand many economic phenomena. The literature on social learning gives rational and plausible explanations for herding behavior and information cascades.
Herding behavior is often associated with people blindly following the decisions of others. Imitating somebody's action can be rational if the predecessor's action affects one's (1) payoff structure such that imitation leads to a higher payoff (payoff externality) and/or (2) his probability assessment of the state of the world such that it dominates the private signal (informational externality). A mixture of both externalities is present in most economic settings. Herding models due to reputational effects in a principal-agent setting are one example. In these models the payoff externalities are endogenous since they depend on the beliefs of the evaluator.
Imitation is only feasible if players move sequentially. The literature distinguishes between exogenous sequencing where the order of moves is pre-specified, and endogenous sequencing where the decision makers decide when to move and whether to move first or not. In endogenous sequencing models, it is possible that every individual (that is, the whole herd) moves at the same time. For example, all agents can move immediately after the leader has made a decision. It might even be the case that everybody decides to move simultaneously. In this case the decision maker has to follow the action he believes the others will take. These different types of herding models are described below in greater detail.
In almost any game, the payoff structure of an agent is affected by the other players' actions. Payoff externalities are often exogenously specified by the payoff structure of the game. These externalities might, however, also arise endogenously. For example, in a multiple agent