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An Information Cascade – A Billion Dollar Company with 1 Employee, $0 in Assets and no Revenue

Source: http://online.wsj.com/articles/feds-put-once-highflying-penny-stock-in-sights-1410479382

Cynk Technology Corp. (NYSE: CYNK) is a company with zero assets, no revenue, operating losses of $1,500,000, and literally 1 single employee. It plans to introduce a website called “introbiz” which is a social network of sorts that would allow you to barter the ability connect socially to other individuals. But not necessarily “normal” individuals; the differentiation of ”introbiz” compared to a Facebook or other social media platform is that you could pay to potentially connect with celebrities. The question here though is how could a company with no assets, no revenue, losses on the book, 1 employee, and no product be valued at more than 4 billion dollars; in July 2014, this is the very question many investors were asking themselves.

CYNK jumped from trading at around $.10 (10 cents) to trading around $15.00; a marked increase of roughly 25,000% within a week’s time. When you consider Apple, as one of the most successful companies to date has only increased just over 18,000% since its IPO over 30 years ago, this alarmed many investors and the S.E.C. What is really interesting about CYNK, which to date has been delisted from the exchanges and is being heavily investigated for fraud and other charges, is how it managed to climb to such obscene heights at all in the first place. A lot of it can be contributed to ideals brought up through information cascades.

A lot of trading today takes place through algorithms, some of which are programmed to pick up on trends (I.E Twitter) and trade based on what’s popular. Given that context, we can fill in the blanks for the model of information cascades. The “state of the world” is whether CYNK is good or bad, the “payoffs” are monetary, and the “signals” are the trends and the trades placed thereafter. Since the difference of only 2 in signals is required to trigger a cascade, it makes sense how something like CYNK could happen. Two trading algorithms pick up on CYNK for one reason or another (happens to be fraudulent rather than genuine in this case), and then other algorithms by tracking trading volume and the increased media attention CYNK is garnering, would trade based solely on those signals. So even though the underlying information behind CYNK is fraudulent, it picked up major traction due to this cascading effect. To further substantiate the cascade model, once it was realized CYNK had no underlying value or assets, it quickly crashed back down to pennies losing billions in value demonstrating how fragile these cascades are; with the introduction of only a little more information, the entire cascade fell apart.

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