Information Cascade or Herd Behavior?
Every day we make numerous decisions that are highly influenced by others. Although we may not realize, these decisions are often influenced by those of others to the extent that we ignore our own opinion and follow the “herd” of society. This phenomenon in which people make similar decisions based on hindsight, is labeled an information cascade. There is a nearly limitless number or scenarios in which an information cascade can occur; choosing what technology to adopt, which politician to support, which team to root for, and even what activity to participate in.
An information cascade essentially occurs when an infinite sequence of individuals makes the same decision while simultaneously ignoring their own signals. However what happens when an infinite number of individuals simply make the same decision while not necessarily ignoring their own private information? This group behavior is labeled as herd behavior. In other words, in herd behavior these individuals acted differently in relation to their private information, yet in the end they acted similarly. Although seemingly similar, these two phenomena must be distinguished.
Information cascades are evident with the adoption of hybrid corn seed during the 1930s, as discussed in lecture, the fall of the Berlin Wall, in which a small protest in Leipzig, Germany slowly formed into a powerful march as well as within the youth riots that shocked England last summer. On the other hand, herd behavior is evident with the grouping of animals in nature, human behavior and stock market bubbles and crashes, street demonstrations, and sporting events. All of these events occur without planned direction between participants. Animals group together as each individual wishes to survive and collectively this is possible. In addition humans are driven by emotion and greed to rush in or out or the market, not necessarily as a result of seeing other shareholders sell their stock, as there is a universal reason to sell – cut losses, gain possible earnings, or any other private signal. Meanwhile demonstrators gather as a result of similar frustrations as they each have a reason, although an information cascade can be attributed to starting a demonstration. Lastly, fans gather independently at a similar place due to their desire to witness the sporting event as their attendance is not dependent on the decision of other fans. In these cases, a similar yet not necessarily public direction is evident almost coincidentally within all participants. Whereas an information cascade exhibits the universal rational rejection of personal signals so that a common or ‘popular’ choice is made. Although each example upon first glance may seem like an information cascade, each example listed exhibits to concept of herd behavior.
This distinction may not always be clear, so herd behavior must be kept in mind when analyzing any phenomena similar to cascades. After reading the article I feel it would be useful for herd behavior to be introduced in class and explained alongside cascades as to further analyze the nature understand cascades.
This distinction was presented to me through an article entitled “Distinguishing Informational Cascades from Herd Behavior in the Laboratory” by Bogachan Celen and Shachar Kariv, professors at NYU and Cal Berkely respectively.
http://emlab.berkeley.edu/~kariv/CK_II.pdf
YOU CALL THAT A FIRST SENTENCE? #scumbagreid