The 2008 Housing Bubble as Information Cascade
After the 2008 housing market collapse, many people asked, “How could this have happened?” The answer lies in information cascades as we have studied them in this class. Each person must decide whether or not to invest in the housing market. They have some internal information (some indicating that investing is a bad idea), about the market and they see the bids of others, but not the reason that others made those bids. This situation meets the criteria for crowd analysis and is completely analogous to the red/blue balls and urns example. Rational people can make decisions that contradict their own internal information.
How could we prevent the next bubble? The naive solution, would be to require all bidders to reveal their internal information. However, that can’t possibly work, no investor wants to reveal all their methods and information. Exclusive access to those methods and information are their livelihood. Some clever solution must be found and implemented to prevent another collapse.
http://www.nytimes.com/2008/03/02/business/02view.html?_r=2&ref=business&pagewanted=all&oref=slogin&