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Localized Conformities like Fashion Trends are Direct Results of Information Cascades

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“A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades”

–  Sushil Bikhchandani, David Hirshleifer, and Ivo Welch

http://snap.stanford.edu/class/cs224w-readings/bikhchandani92fads.pdf

Los Angeles is the home of Hollywood movie stars, lavish nightlife and cuisine; but most of all, it is the birthplace of funky, modern fashion trends.  Due to this little known fact, Sushil Bikhchandani, hit the streets to explore the reasoning behind localized cultural trends such as fashion fads and social customs and what causes small shocks versus large, long-lasting changes.

Bikhchandani is a professor at the University of California, Los Angeles, studying decision, operations, and technology management, with a special interest in auctions, market interests, and herd behavior. He looks at uniform social behaviors and their prevalence in many diverse aspects of society.  As a result of his research in these fields, he has found an explanation of what is not only the cause of short-term booms and busts in some situations, but also the motivation behind long-term conformity in others. The answer is found in the contemporary model known as information cascades.

As we have learned in class, an information cascade is defined as the action sequence when individuals, having observed the choices and decisions of those prior, follow the in the same path of the preceding individuals without considering their own information.  The example of a customer choosing to eat at a restaurant he read a bad review on simply because it is bustling with people clearly depicts this definition.  It shows that the customer chose the crowded restaurant assuming that everyone else had received information that it is a good place to eat, while ignoring completely the information he received himself from reading the review.  This can be directly related to the studies held by Bikhchandani, Hirshleifer, and Welch.

Clothing stores and particular styles are popularized as a result of information cascading. As introduced earlier, Bikhchandani explores the aspect of short-term versus long-term effects further than what we have discussed in class.  He concludes that short-term booms and busts are more often than not a result of an incorrect information cascade.  This means that the people who began the cascade received signals that did not actually reflect the reality of the situation.  Thus, the ‘wrong’ choices of these few initial people influenced a multitude people after them.  Clearly, after a short while these mistakes will be realized and the boom will come to an abrupt end. Bikhchandani warns, especially in a misleading cultural scene such as fashion in LA, economists must be careful not to fall into a trap of an incorrect information cascade!

-Miss Piggy

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