Informational cascade
Encyclopedia
An information cascade occurs when people observe the actions of others and then make the same choice that the others have made, independently of their own private information signals. There is a nearly limitless set of situations in which people are influenced by others: in the opinions they hold, the products they buy, the political positions they support, the activities they participate in, the technologies they use, and many other things. Information cascade is commonly seen in groups under immediate stress from external forces, such as in herd behavior. The effect is to cause group decisions based on few signals and can often be against what the individual believes to be true. Because it is usually sensible to do what other people are doing, the phenomenon is assumed to be the result of rational
choice. Nevertheless, information cascades can sometimes lead to arbitrary or even erroneous decisions. The concept of information cascades is based on observational learning theory
and was formally introduced in a 1992 article by Sushil Bikhchandani, David Hirshleifer
, and Ivo Welch
.
There are two key conditions in an information cascade model:
In what has been termed a "reputational cascade", late responders sometimes go along with the decisions of early responders, not just because the late responders think the early responders are right, but also because they perceive their reputation will be damaged if they dissent from the early responders.
An example of social proof
in that people will see the actions of the group and will feel compelled to act with the larger group of people. People in large groups will tend to act with a heard mentality. Large groups of people can be controlled with little information passed down from a small few to a large group.
, either for the whole market (market bubble...) or a specific asset, for example a stock that becomes overly popular among investors.
Marketers also use the idea of cascades to attempt to get a buying cascade started for a new product. If they can induce an initial set of people to adopt the new product, then those who make purchasing decisions later on may also adopt the product even it is no better than, or perhaps even worse than, competing products. This is most effective if these later consumers are able to observe the adoption decisions, but not how satisfied the early customers actually were with the choice. This is consistent with the idea that cascades arise naturally when people can see what others do but not what they know.
Information cascades are usually considered by economists:
, a law professor, analyzed the legal aspects of informational cascades and gave several examples in his book The Legal Analyst: in many military courts, the officers voting to decide a case vote in reverse rank order (the officer of the lowest rank votes first), and he suggested it may be done so the lower-ranked officers would not be tempted by the cascade to vote with the more senior officers, who are believed to have more accurate judgement; another example is that countries such as Israel
and France
have laws that prohibit polling days or weeks before election
s to prevent the effect of informational cascade that may influence the election results.
Rationality
In philosophy, rationality is the exercise of reason. It is the manner in which people derive conclusions when considering things deliberately. It also refers to the conformity of one's beliefs with one's reasons for belief, or with one's actions with one's reasons for action...
choice. Nevertheless, information cascades can sometimes lead to arbitrary or even erroneous decisions. The concept of information cascades is based on observational learning theory
Social learning theory
-Theory:Social learning theory is derived from the work of Albert Bandura which proposed that social learning occurred through four main stages of imitation:* close contact* imitation of superiors* understanding of concepts* role model behavior...
and was formally introduced in a 1992 article by Sushil Bikhchandani, David Hirshleifer
David Hirshleifer
David Hirshleifer is a prominent American economist. He is a professor of finance and currently holds the Merage chair in Business Growth at the University of California at Irvine. He previously held tenured positions at the University of Michigan, The Ohio State University, and UCLA. His work...
, and Ivo Welch
Ivo Welch
Ivo Welch is an American economist at UCLA. His work has focused on financial economics and informational cascades. In 2007, he was ranked as the 54th most cited economist by web of science's Most-Cited Scientists in Economics&Business...
.
There are two key conditions in an information cascade model:
- Sequential decisions with subsequent actors observing decisions (not information) of previous actors.
- A limited action space (e.g. an adopt/reject decision).
Examples and fields of application
Information cascades occur in situations where seeing many people make the same choice provides evidence that outweighs one's own judgment. That is, one thinks: "It's more likely that I'm wrong than that all those other people are wrong. Therefore, I will do as they do."In what has been termed a "reputational cascade", late responders sometimes go along with the decisions of early responders, not just because the late responders think the early responders are right, but also because they perceive their reputation will be damaged if they dissent from the early responders.
An example of social proof
Social proof
Social proof, also known as informational social influence, is a psychological phenomenon where people assume the actions of others reflect correct behavior for a given situation...
in that people will see the actions of the group and will feel compelled to act with the larger group of people. People in large groups will tend to act with a heard mentality. Large groups of people can be controlled with little information passed down from a small few to a large group.
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 movesMarket price
In economics, market price is the economic price for which a good or service is offered in the marketplace. It is of interest mainly in the study of microeconomics...
, either for the whole market (market bubble...) or a specific asset, for example a stock that becomes overly popular among investors.
Marketers also use the idea of cascades to attempt to get a buying cascade started for a new product. If they can induce an initial set of people to adopt the new product, then those who make purchasing decisions later on may also adopt the product even it is no better than, or perhaps even worse than, competing products. This is most effective if these later consumers are able to observe the adoption decisions, but not how satisfied the early customers actually were with the choice. This is consistent with the idea that cascades arise naturally when people can see what others do but not what they know.
Information cascades are usually considered by economists:
- as products of rational expectationsRational expectationsRational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in...
at their start, - as irrational herd behaviorHerd behaviorHerd behavior describes how individuals in a group can act together without planned direction. The term pertains to the behavior of animals in herds, flocks and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations, sporting events,...
if they persist for too long, which signals that collective emotions come also into play to feed the cascade.
Historical examples
- Small protests began in LeipzigLeipzigLeipzig Leipzig has always been a trade city, situated during the time of the Holy Roman Empire at the intersection of the Via Regia and Via Imperii, two important trade routes. At one time, Leipzig was one of the major European centres of learning and culture in fields such as music and publishing...
, Germany in 1989 with just a handful of activists challenging the German Democratic RepublicGerman Democratic RepublicThe German Democratic Republic , informally called East Germany by West Germany and other countries, was a socialist state established in 1949 in the Soviet zone of occupied Germany, including East Berlin of the Allied-occupied capital city...
. For almost a year, protesters met every Monday growing by a few people each time. By the time the government attempted to address it in September 1989, it was too big to quash. In October, the number of protesters reached 100,000 and by the first Monday in November, over 400,000 people marched the streets of Leipzig. Two days later the Berlin WallBerlin WallThe Berlin Wall was a barrier constructed by the German Democratic Republic starting on 13 August 1961, that completely cut off West Berlin from surrounding East Germany and from East Berlin...
was dismantled.
- The adoption rate of drought-resistant hybrid seed corn during the Great DepressionGreat DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
and Dust BowlDust BowlThe Dust Bowl, or the Dirty Thirties, was a period of severe dust storms causing major ecological and agricultural damage to American and Canadian prairie lands from 1930 to 1936...
was slow despite its significant improvement over the previously available seed corn. Researchers at Iowa State UniversityIowa State UniversityIowa State University of Science and Technology, more commonly known as Iowa State University , is a public land-grant and space-grant research university located in Ames, Iowa, United States. Iowa State has produced astronauts, scientists, and Nobel and Pulitzer Prize winners, along with a host of...
were interested in understanding the public's hesitation to the adoption of this significantly improved technology. After conducting 259 interviews with farmers it was observed that the slow rate of adoption was due to how the farmers valued the opinion of their friends and neighbors instead of the word of a salesman. See for the original report.
Legal aspects
The negative effects of informational cascades sometimes become a legal concern and laws have been enacted to neutralize them. Ward FarnsworthWard Farnsworth
Ward Farnsworth is a law professor at Boston University and author of books andacademic articles on a range of subjects.Farnsworth graduated with high honors from University of Chicago Law School in 1994, where he served on the law review and was Hinton moot court co-champion. He served as a law...
, a law professor, analyzed the legal aspects of informational cascades and gave several examples in his book The Legal Analyst: in many military courts, the officers voting to decide a case vote in reverse rank order (the officer of the lowest rank votes first), and he suggested it may be done so the lower-ranked officers would not be tempted by the cascade to vote with the more senior officers, who are believed to have more accurate judgement; another example is that countries such as Israel
Israel
The State of Israel is a parliamentary republic located in the Middle East, along the eastern shore of the Mediterranean Sea...
and France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
have laws that prohibit polling days or weeks before election
Election
An election is a formal decision-making process by which a population chooses an individual to hold public office. Elections have been the usual mechanism by which modern representative democracy operates since the 17th century. Elections may fill offices in the legislature, sometimes in the...
s to prevent the effect of informational cascade that may influence the election results.
See also
- ConformityConformityConformity is the process by which an individual's attitudes, beliefs, and behaviors are influenced by other people.Conformity may also refer to:*Conformity: A Tale, a novel by Charlotte Elizabeth Tonna...
- GroupthinkGroupthinkGroupthink is a psychological phenomenon that occurs within groups of people. It is the mode of thinking that happens when the desire for harmony in a decision-making group overrides a realistic appraisal of alternatives. Group members try to minimize conflict and reach a consensus decision without...
- Herd behaviorHerd behaviorHerd behavior describes how individuals in a group can act together without planned direction. The term pertains to the behavior of animals in herds, flocks and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations, sporting events,...
- SheepleSheepleSheeple is a term of disparagement, in which people are likened to the herd animals sheep. The term is often used to denote persons who voluntarily acquiesce to a perceived authority figure's suggestion without critical analysis or sufficient research to understand the ramifications of that decision...
- Social proofSocial proofSocial proof, also known as informational social influence, is a psychological phenomenon where people assume the actions of others reflect correct behavior for a given situation...
External links
- Informational Cascades and Rational Herding: An Annotated Bibliography and Resource Reference
- A Bibliography of Information Cascades and Herd Effects
- How a Bubble Stayed Under the Radar, Robert Shiller NYT article, may require login.
- How the Low-Fat, Low-Fact Cascade Just Keeps Rolling Along, John Tierney October 9, 2007 NYT blog, does not require login.
- Schopenhauer on Cascades, John Tierney, October 10, 2007 NYT blog, does not require login.
- Thresholds and Collective Action, CMU 15396 lecture by Luis von Ahn PDF of lecture slides
- Is Justin Timberlake a Product of Cumulative Advantage? Informational Cascade with another name, NYT article, may require login.
- Information Cascades in Magic
- Social proofSocial proofSocial proof, also known as informational social influence, is a psychological phenomenon where people assume the actions of others reflect correct behavior for a given situation...