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Being a Sheep: Information Cascades

Say a person decides to go to a restaurant, but he is not sure on where he wants to eat. He is craving Italian food, but when he goes to the Italian restaurant, it is empty. However, next to the Italian restaurant is a Mexican restaurant, and that restaurant is packed. The man then decides to go to the Mexican restaurant, instead of the Italian restaurant, because there are more people inside of that restaurant. That is an example of an information cascade. An information cascade is when a person’s decisions are influenced by other people, and that person will, in a sense, “follow the crowd.”

In the article, the author, Pierre Lemieux, talks about information cascades, the kinds of cascades, and their effects. In addition to that, he talks about how people are now starting to follow the heard. One of the most potent examples of information cascades, that is brought up within the article, exists within the financial sector. A lot of people do not know how to invest in the market, and most of the people that do, listen to the advice of other people. Either that, or they follow the trends that other people talk about. Most of the people that do invest, get tips from some of their friends, or from watching CNBC. In addition to that, the existence of financial bubbles are one of the biggest information cascades within the financial sector.

http://object.cato.org/sites/cato.org/files/serials/files/regulation/2003/12/v26n4-2.pdf

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