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Customs and Cascades

Sanctions on deviants, positive payoff externalities, conformity preference, and communication constitute the four mechanisms of uniform behavior; however, they each fail to acknowledge the possibility of erroneous behaviors and the brittle nature of the uniform nature in general. In the Journal of Political Economy, then,  authors Sushil Bikhchandani, David Hirshleifer, and Ivo Welch offer “an explanation not only of why people conform but also of why convergence of behavior can be idiosyncratic and fragile” by an examination of informational cascades.

An informational cascade ensues when an individual, taking part in a sequential process of decisions, observes preceding decisions and then takes the same action in lieu of a decision that would have been made using only his private information. From this point onward, individual decisions converge to one decision that is based on very little information (the initial decisions). Rational or otherwise, cascades occur in many realms: in finance, “the arrival of a first takeover bid frequently attracts competing bids, despite the fact that the presence of the first bidder drives up the price.” In politics, a candidate’s positive performance in the polls causes future poll respondents to view the candidate more favorably. In the workforce, a job applicant lacking in the work experience section of a resume signals a potentially poor quality worker to employers, who then continue to reject the applicant. Cascades are also found in nature, where, for example, the number of female fallow deer vying for a particular mate “correlates with the number of females already present.”

Cascades can pose a problem because individual actions do not correlate with individual private information. That is, no new information is introduced in the system, and future decisions made in the cascade are not more informed/improved/supported than earlier ones. For instance, in medicine, many physicians are not up to date with “the cutting edge of research” and rely on the safety of numbers by adopting widely-accepted procedures when faced with indecision. This logic, though, is what led to a decades-long, unnecessary, and even harmful, routinized tonsillectomy. In the case of the fallow deer mate selection, a male may not be the most popular because he is truly the most qualified but rather because he, by chance, attracted the first female mate-seekers, who in turn brought a cascade of other females.

Fortunately—at least, it is fortunate in the case of irrational cascades—cascades are generally brittle. While a mass behavior is reinforced as that mass grows, the “depth” (quality) of the behavior is unchanged. That is, “further adoptions [of a behavior in a cascade] are uninformative” and do not contribute to the behavior’s correctness. As a result, the uniformity of behavior is fragile, and new information or change of action can reverse, otherwise alter, or demolish the cascade.



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November 2014