Information Cascade Experiments
In this excerpt from “The Handbook of Results in Experimental Economics” the writers define what cascades are and then go on to give examples of how they have been studied. The writes define cascades as when “the first few decision makers reveal their information, and subsequent decision makers may follow an established pattern even when their private information suggests that they should deviate.” This definition fits our class example of the blue-blue-red urn. In that example two people go up to the urn pick a marble and announce the color they think is the majority; they both announce red. The third person picks a blue marble. This is their private information. The public information they have is that the other two must’ve picked blue. Given this they deviate from their private information and choose red.
The article lists more studies that reveal similar information. For example the article cites Camerer and Weigelt’s 1991 study that “imitation of earlier decisions may occur even if initial trades are not based on superior information.” For example, in the stock market it may be useful to observe what other people are buying as this gives information to what they think is a quality stock. However if those initial purchases were based of randomness then those who buy the stock based on this public information will also be acting on randomness as well. The spread of this is again an example of the cascades we talked about in class. Only in this example it is a mis-information cascade instead of an informative one.
Information Cascade Experiments