Information Cascades in Stocks
The information cascade is a concept that affects many real-world situations. One situation highlighted by The Economist in an article called “Information Cascades” is the stock market. Information cascades are defined in the article as the result of people making decisions based on their observations of other peoples’ actions.
The first example of information cascades in the stock market is Netflix stock. When the price is dropping, more people sell and when the price is rising, more people buy. Because people base their decisions on other people’s actions, we see a snowball effect, which makes it difficult for the Netflix stock to find an equilibrium. Figuring out how many other stocks exhibit these effects is an important question about the stock market.
This behavior of stocks in the stock market is just like the information cascades we have learned about in class. The main point we learned is that even rational individuals can choose to abandon their own personal information to go with the crowd. We also have now seen how these kinds of information cascades relate to probability.
source: http://www.economist.com/blogs/democracyinamerica/2011/10/mass-movements