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Information Cascades and Social Media

“In the age of 2018, tweets don’t just make national policy – they move markets.”

Social media is an incredibly powerful tool that allows a single person to have an effect on hundreds to billions of people. Just one post by someone with a large number of followers can inspire market movements, protests, or up-and-coming trends. Specifically, an information cascade is a situation where each person makes a decision based on the choices of others while ignoring their own personal information. A recent tweet by Elon Musk can show just how powerful a few words can be in causing stock prices to change.

“Am considering taking Tesla private at $420. Funding secured.” – Elon Musk

Within minutes of this tweet, the stock surged from $355 to $370, and upwards from the for a time afterward. Conventional CEOs are careful to avoid making comments that could alter the market for their company’s stock. However, Musk decided that combining their recent share price increase of the last two weeks and their relatively favorable second-quarter results with a tweet that could bring interest in their stock might shell-out positively for Tesla. He was right for time, as the increasing slope of the Tesla stock market price inspired people to

  1. Make a decision to buy or not buy the stock.
  2. Understand what makes other people so interested in buying the stock.
  3. Realize that the timing for the increase in price for the stock was mostly hype – but that the increasing stock price was very real. People understood that an increased level of interest in the stock would result in a higher price of the stock, and bet their own investments on this conjecture.

These steps are the core of what happens in an information cascade: People understand that there is money to be made and base their decisions on the actions of others while ignoring their own personal information. They understand that the price of the stock will only increase because of interest in the stock, and not because the company is producing a superior product or any other measurable metric.


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