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Negative Effects of Information Cascades

In the past few years we have seen the growing influence of the internet in our daily lives. From smart phones to the immense popularity of services like YouTube and Netflix, the networks we have at our disposal give consumers immense utility. The popularity of websites that offer reviews of services and products has also grown because of their ease of use. While one may assume that these are all positive affects, it’s important to keep in mind the aspect of negative externalities.

According to Wenjing Duan, Bin Gu, and Andrew B. Whinston of the McCombs School of Business, The University of Texas at Austin, there is substantial evidence of believed utility actually being lowered by the mechanics of certain websites. In their study, they analyzed the popularity of downloads on CNETD or CNet.com Downloads. They recorded the longevity of their popularity and the source, e.g. which category of software they were from. In their findings, they saw that downloaded programs that achieve high popularity correlate with recent popularity. However, the correlation of recent popularity and long-term popularity are negative and significant reflecting that often new programs explode to the top of a list and after a short duration die off. The importance of this study is that all of the analysis points towards information cascades as the culprit for this behavior of downloading. The programs that related to networking or chatting had a higher correlation with this phenomena of rapid, recent popularity where many people quickly rate a program well and it has large amounts of downloads. Also important to note is that 37% of the most popular downloads were taken from the “user rated” category, indicating that users would rather use the opinion of other users rather than the administrators of the site (who also happen to review products).

While this may seem obvious to those who spend a lot of time on the internet, it’s important to understand the networking implications of this effect. It shows that while many people assume that the internet increases utility for consumers, if information cascades play a larger role than expected, than this utility can be quickly neutralized by blind assumption of validity. One could consider the effects cascades on other websites: product reviews, local service reviews, as well as travel websites. All of these often utilize user ratings and comments and display them for others to see. If an initial item such as a new download, new song, or new video shows up on the front page, it is not a far stretch to think that they may have gotten there simply by information cascade rather than the integrity of utility. This reveals the propensity of consumers to believe others’ opinions rather than that of an expert in some situations. It also reflects that a consumers’ perceived knowledge is often more than enough to justify buying a product.

Sources:

http://web.merage.uci.edu/~veecee/WISE2005/papers/201.pdf

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