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Stocks and Revolutions and Information Cascades, Oh My

This article from The Economist talks about the influence of information cascades on global population behavior. Specifically, it briefly analyzes information cascades relating to stocks and revolutions. For example, the stock price of Netflix at one point became a “freelance entity” without any “corporate fundamentals,” thus becoming an equilibrium-less price value, as when the price rose, more people would buy, and the price would continue to rise, and when the price fell, more people would sell, and the price would continue to fall. For typical equilibrium prices, the price tends toward the equilibrium value instead of away, which is why this stock price is not an equilibrium. As it turns out, information cascades are very important in the behavior of traders in the stock market and have influenced financial crises. A semi-recent example is when, in October of 2011, leaders of euro-zone countries met to agree on the value of governmental debt. During their meeting, stock markets were steady, but if the leaders had failed to come to an agreement, traders would have seen if they could break the tentative commitment to keep stock spreads low and would have repurchased bonds. If some traders were successful, then many others would have followed their example, and prices would plummet, (this article was actually written on the day that the leaders met, and so the article did not delve into any details about what ended up happening).

Additionally, political regime changes can be brought about by either the “occurrence or threat of revolution” spread by information cascades. Basically, if some people are considering rebellion, say a group of workers, then others will decide to rebel or not by observing each other’s behavior as well as “observing ‘signals’ that they may receive about the state of the regime.” Thus, if some workers rebelled, others would follow. Revolutions are in fact often a surprise due to the fact that they are frequently caused by information cascades and people basing their decisions off of crowds. Another example is from 2011 when people camped out to protest economic inequalities. Protests in New York City spurred ones in Boston, London, Amsterdam, and many other places worldwide.

In general, changes in information technology and social media outlets are leading to information cascades and more “rapid herd behavior,” which in turn leads to a “more unified global society” with more “positive feedback loops, fewer natural checks on self-exacerbating mass phenomena, and a lower probability that things in any given sphere will tend towards an equilibrium rather than cycling wildly between various creative and/or disastrous extremes.”


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