Information Cascades Falling Short of Expected Returns
The recent financial crisis in the United States left many people unemployed and the search for jobs led them to explore many unique fields. People looked to their hobbies and interests in search for inspiration. Yoga was one such field which rose to prominence around this time.
The article published in the Money Section of US News addresses this sudden increase in the number of yoga teachers. People laid off from their jobs used the recession as an opportunity to learn the techniques of yoga and then used their newly acquired skills to teach others the same and earn a living in the process. Some citizens felt that the job of being a yoga teacher gave them immense satisfaction and pleasure, something they did not experience in their otherwise mundane jobs. The sheer magnitude of people joining the yoga world led to an increase in the publications of the Yoga Journal by around 300 percent in this period and training centers started getting more and more students too. The demand for yoga teachers was ever increasing and many people decided to take up yoga teaching as their primary profession. Influenced by the actions of others, people joined this bandwagon only to realize later that the profession gave a meagre income of between $50 and $200 a week which was too little for most people to maintain their lifestyle. Only those who did it out of passion seemed to be happy with their jobs but others began looking elsewhere for other sources of income.
This situation mirrors one of the concepts we have studied – an information cascade. There is a decision to be made by people who are laid off as to which profession to get involved in to maintain a steady source of income. Not all people are laid off at the same time, so people sequentially reach the situation where they must make this choice. They all have some private information about the benefits of becoming a yoga teacher but their final decision is influenced by the sheer magnitude of others who have already taken up the profession before them. The popularity of the profession does not bring to light the benefits and the problems that current yoga teachers are facing. Thus, on simply following the information cascade many new yoga teachers soon realize that the job is not very lucrative and they are forced to reconsider their decision as the payoff simply does not meet their expectation. This provides an example of an information cascade that leads to a lot of people ending up taking the wrong decision as they are influenced by the informational effects of the crowd.