The Dangers of Information Cascades in Crowdsourcing
Kickstarter in an online crowdsourcing where startup companies or people can ask for funding for projects, and in return people who back a startup can receive some sort of compensation, whether it is a completed product, or a small gift. However, Kickstarter is not perfect. There have been multiple cases in which people claimed to be creating a product, and were able to raise tremendous amounts of money, only to disappear once they had collected the funds for their research. In one case, a team managed to raise $344,000 for 2,106 donations, only to disappear after collecting their profit.
The reason that it is possible for people to raise such a huge amount of money with no actual business or product is due to the power of information cascades. The amount of money raised and the number of donors is visible in Kickstarter. Because of this, there is a tipping point, where potential backers will assume that an idea will be successful, even if their own signals would indicate that it is a bad idea, or may not be legitimate. It is natural to assume that a project that has already received massive amounts of donations has been verified; when in reality the first donors may have had equally little information. Using our knowledge of information cascades, we can see that an average Kickstarter user may likely ignore their own signal, and instead follow the cascade.
Due to the dangerous nature of information cascades, a Kickstarter user needs to remember that a heavily funded project may have only gotten so much attention because it managed to reach a tipping point. Past that point, the success of the project does not necessarily reflect upon the merits of the project, but rather the nature of an online user to join the masses in making a decision, even if it’s a bad one.
Source: http://www.dailydot.com/business/why-kickstarter-ripe-scams/