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Cascades and Crashes

As discussed in class, information cascades are prevalent where people rely on others to make decisions. It was seen in the case of the marbles example, and is relevant in finance as well as politics. The article referenced discusses the bad image of the value of debt in southern European economies. It talks about the impact that information cascades have on the political system as well as the stock market. The main issue with information cascades is that it is largely relevant to how stock markets function. Stocks are all about what the buyers and sellers think of the company and how well it is doing. People always rely on other people in the market to make a decision to buy low or sell high. Because of this, the article mentions that the 17 leaders of the Eurozone countries are meeting to prevent an information cascade of making the situation worse.

We can see so many examples of how information cascades have affected the stock market. We have the somewhat recent stock market crash, a recession a few years ago. So many people had bought into the stock market, driving prices up, money flowing around, more than was available. People blindly did what the crowd did and kept driving prices up. Eventually we get the recession and people lose trust in the stock market and the whole financial system. This type of information cascade also happens with politicians, especially around the time of elections. So many people try to advocate for certain ideals. And they try to portray themselves as an ideal candidate so people will vote for them. Here we can see a rise in an information cascade where the voters vote for a person just based on that one view and because the people around them vote for that person for little valid reason. Hence we have the derogatory campaigns of politicians toward other candidates. They try to expose the bad qualities and things that their opposition has done and try to disrupt that information cascades. This, however, can lead to a different type of information cascade where people all switch their votes or interests just because of one advertisement. We can see examples of this in the presidential campaigns. Whether it be in politics or finance, past or present, the presence and impact of information cascades exist all the time.

Reference:

http://www.economist.com/blogs/democracyinamerica/2011/10/mass-movements

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