Mass Movements: Information Cascades
The idea of information cascades is deeply rooted in the evolution of stock prices. Stock price trends of Netflix essentially reflects the power as well as the fragility of information cascades as people trade stocks. Netflix for a long time had increasing stock prices. There was no room for anyone who tried to short Neflix. The prices of stocks kept rising, thus enticing more people to buy them. Unlike normal companies where there is an equilibrium point and a falling stock price is “met with shorts taking profits and supporting it,” the price of Neflix rose uncontrollably. This same trend happened with Netflix once again as the price fell. As the price fell, more people sold their stocks, driving the price down even more.
The force at play here is indeed the cascade effect. Investors were relying on the actions of others and not on complete information. Thus when the prices of Netflix stock fell due to a few people selling their stocks, other people observed this action and followed suit. They decided to sell their stocks as well due to the actions of others. The succeeding investors sold their stocks as well, ballooning the cascade effect. More and more people ended up selling their stocks mainly due to the actions of the early few that sold their stocks. The fragility of information cascade is demonstrated as more people bought Netflix stocks. This drove prices up. More people followed suit buying stocks in response to others buying stocks.
The article went on to describe how cascading effect is also part of the reason for political regime changes especially during the “Arab spring.” In this case there was information cascade both within and between countries. When a few rebel, others follow. As others follow, it becomes easier for more people to join in the revolution. The author specifically described cascade as “when people make decisions on the basis of their observations of other people’s action.” This is applicable in the financial market just as much as it is to the “Arab spring.”
http://www.economist.com/blogs/democracyinamerica/2011/10/mass-movements