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Information Cascade

http://www.cato.org/pubs/regulation/regv26n4/v26n4-2.pdf

Information cascade refers to the phenomenon that people would make choices based on the actions of other people, sometimes regardless of their own private information. The article above uses this phenomenon to explain why public opinion changes rapidly. One theory the author mentions is the theory developed by Timur Kuran. Kuran proposes that people may have a false preference that is displayed to the public while keeping their true opinions private. This is done in order to uphold their reputation. However, an individual will only falsify his preferences up to a certain point, up to which his integrity would start to dominate over his reputation. Therefore, the individual is constantly maximizing his utility by finding a balance between the two forces of reputation and integrity.

There are many factors considered by Kuran when developing this theory, but some of the important ones are availability cascade, availability heuristics, and reputational factors. Availability cascade is the idea that one follows the crowd because one needs to maintain its social reputation and acceptability. Availability heuristics describes the notion that individuals not only trust the crowds’ action because they think it would be costly to reproduce the same result, but also take the simple availability of the information as an indication of its reliability. Reputational factors refer to how reputational factors would greatly affect one’s decision making. For example, people tend to throw away their private information more often under social influences, as well as easily disregarding new information since no one would want to risk his/her reputation by going against the current social trend.

Although the case that we discussed in class did go into the rational thought process a little, we did not go into detail about what other factors may play a role in such decision making process. In class, we mentioned that after the second person, the third person’s action would be deemed to be unreliable since s/he would imitate the two prior actions (assuming that they are the same). This is because the third person thinks that the two prior actions are reliable and are more trustworthy than her own private information. However, are there more to this than just simple probability and statistics?

Taking the theory proposed in this article into consideration, we can see that other social factors such as reputation, integrity, and easily accessible information all play a role in the decision process. Perhaps it is due to the pressure to conform, that the third person chose to imitate the prior actions rather than following his/her private information signal. Perhaps s/he did not calculate the statistics and simply believed that the prior actions were reliable. Perhaps s/he thinks that the easily accessibility of the prior actions causes the information to be trustworthy. Perhaps it is the person who made the prior action that caused the action to seem more reliable. For example, a fashion trend is often started by a certain famous celebrity or model. Because the celebrity has done the certain action, many people would believe that the action is right and is an illustration of the current trend. Therefore, they would blindly follow the trend without doing much fashion research on their own.

This decision making process can get complex as we dig deeper. However, no matter which view we take. Whether it is from a statistics point of view or a psychological point of view, information cascade is definitely an interesting phenomenon and a valuable source showing how network can influence ones’ decision making.

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