Information about Information Cascade
Informational cascade is a situation in which every subsequent actor, based on the observations of others, makes the same choice independent of his/her private signal. In an informational cascade, everyone is individually acting rationally. Still, even if all participants as a collective have overwhelming information in favor of the correct action, each and every participant may take the wrong action.
A little bit of public information (or an unusual signal) can overturn a long-standing informational cascade. That is, even though a million people may have chosen one action, seemingly little information can induce the next million people to choose the opposite action. Fragility is an integral component of an informational cascade. There are two key conditions in an informational cascade model:
Information cascades are usually considered by economists:
A little bit of public information (or an unusual signal) can overturn a long-standing informational cascade. That is, even though a million people may have chosen one action, seemingly little information can induce the next million people to choose the opposite action. Fragility is an integral component of an informational cascade. There are two key conditions in an informational cascade model:
- Sequential decisions with subsequent actors observing decisions (not information) of previous actors.
- A limited action space (e.g. an adopt/reject decision). http://welch.econ.brown.edu/cascades/#79
Examples and fields of application
Suppose that there is a crossroad where everyone must choose whether to go left or right. If a person goes the wrong way he will be eaten by a grizzly bear, but if he goes the correct way he’ll end up in safety. Unfortunately, people have imperfect information, so they’ll only be right 2/3 of the time. If person 1 thinks left, he will go left. If person 2 thinks left he will also go left. However, if person 3 thinks that right is correct he will go left anyway. This is because the combined information of observing person 1 and person 2 go left is greater than person 3’s private information that right is correct. Even if every other person thinks that right is correct, they will all go left based on the actions of the first two individuals. In this scenario society will usually go the correct way, but at least one out of nine times everyone will go the wrong way. Luckily, even the hungriest grizzly bear will not eat more than a few adult humans at any one time, and so society survives in spite of itself.Market cascades
Information cascades have become one of the topics of behavioral economics, as they are often seen in financial markets where they can feed speculation and create cumulative and excessive price moves, either for the whole market (market bubble...) or a specific asset, for example a stock that becomes overly popular among investors.Information cascades are usually considered by economists:
- as products of rational expectations at their start,
- as irrational herd behavior if they persist for too long, which signals that collective emotions come also into play to feed the cascade.
See also
External links
- Informational Cascades and Rational Herding: An Annotated Bibliography and Resource Reference
- A Bibliography of Information Cascades and Herd Effects
- Information Cascades in Magic
- Is Justin Timberlake a Product of Cumulative Advantage? Informational Cascade with another name, NYT article, may require login.
U. a. horribilis
Trinomial name
Ursus arctos horribilis
(Ord, 1815)
The grizzly bear, sometimes called the silvertip bear
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Trinomial name
Ursus arctos horribilis
(Ord, 1815)
Range map '''
The grizzly bear, sometimes called the silvertip bear
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Behavioral finance and behavioral economics are closely related fields which apply scientific research on human and social cognitive and emotional biases to better understand economic decisions and how they affect market prices, returns and the allocation of resources.
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Market price is an economic concept with commonplace familiarity; it is the price that a good or service is offered at, or will fetch, in the marketplace; it is of interest mainly in the study of microeconomics.
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economic bubble (sometimes referred to as a "speculative bubble", a "market bubble", a "price bubble", a "financial bubble", or a "speculative mania") is “trade in high volumes at prices that are considerably at variance from intrinsic values”.
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Rational expectations is a theory in economics originally proposed by John F. Muth (1961) and later developed by Robert E. Lucas Jr. It is used to model how economic agents forecast future events.
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Herd behaviour describes how individuals in a group can act together without planned direction. The term pertains to the behaviour of animals in herds, flocks, and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations,
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Groupthink is a type of thought exhibited by group members who try to minimize conflict and reach consensus without critically testing, analyzing, and evaluating ideas.
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Herd behaviour describes how individuals in a group can act together without planned direction. The term pertains to the behaviour of animals in herds, flocks, and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations,
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