Practical Applications of Information Cascades
http://www.economist.com/blogs/democracyinamerica/2011/10/mass-movements
http://www.voxeu.org/article/riots-and-revolutions-digital-age
Information Cascades, when completely simplified, seem to mean nothing more than people imitating each other, which is a very natural thing for human beings to do. Why, then, does it have such an impact on so many fields and markets?
Take the labor market for example. When a few workers rebels against, say, the wage rate, others tend to follow suit simply because that is the best available option based on the information they have. They rebel based on who else rebels and some “signals” they receive about their employers and the situation. These observers believe that since a few people already rebelled, more people rebelling will further weaken their employers who will be forced to submit to their demands. Thus, an information cascade follows. This can in fact be applied to rebellions of any kind, even those against legendary dynasties or rulers. How does the ruler react to this? If he anticipates a rebellion, he takes measures like redistributing income or somehow curbing the information flow to avoid a cascade. However, since this may involve considerable redistribution, rulers choose to live elite lives instead with a small risk of rebellion – or what they think is a small risk. These rulers are in fact very susceptible to rebellion, even though they are surprised by it. A practical application is the Arab Spring.
Let us also look at the financial market. While it is a little more subtle, the same concept as above definitely applies to this market as well. The article discusses Europe’s 2011 financial crisis, however this can also translate to the recent Greek crisis the Eurozone faced. The stock prices work like freelance entities in the sense that when prices are rising, more people buy them thus driving the price up, and when prices are falling, the reverse happens. There is no equilibrium value. European markets were holding flat, so traders would test the waters to see if they could short Italy’s debt. If some succeed, others will follow in an information cascade, and prices would plummet.
Riots, protests, etc. can also be thought of as information cascades. Thus, these seemingly simple phenomena have in fact a large impact on day to day life.