Controlling the Herd: Applications of Herding Theory

Abstract

The literature on informational cascades and herding theory has for a decade focused on the externality and suboptimal outcomes generated from decision-making when spaces are coarser than private information spaces. Much of the output has therefore been positive, not normative. This paper redresses this imbalance by detailing several direct applications for marketing and business arising from herding theory. We see that business practices such as encouraging early sales, or selling to groups rather than individual customers, can be justified theoretically by direct application of herding theory.