Information Cascades: Explains the Fragility of the Economy
The dynamics of information cascades are exhibited by the trend that people tend to follow other people despite the lack of supporting evidence for such action. An information cascade can cause the most stable economy to fall or the most unstable economy to thrive. There are several ways that can happen. For example, if one influential economist states that the stock market is going to crash, those that are less educated will begin to cash out their investments. However, they don’t realize that by cashing out their investments, they are the ones causing the stock market to crash. For those that do realize this fact, they also realize that there is a significant percentage of the population that doesn’t realize this fact, and thus for their own payoffs, they are influenced to cash out as well. You see, in that example, there are two distinct sectors of the population — one that are well-educated in the matter and one that is not. The economist’s statement directly influences the latter. This illustrates a successful information cascade that have spread.
However, if the population size of the latter is large enough, the economist’s statement will indirectly affect the former population sector. On the other hand, if the number of people who would cash out their investments solely based on the economist’s statement is minimal compared to those who would not, then the economist’s statement is effectively ignored. This illustrates a failed information cascade that was stopped by a cluster.
The network of the world or even independent nations is much more complicated, it contains many much separate sectors than 2. These many independent sectors are generally weakly linked to each other, thus making it more fragile and easier for information cascades to successfully propagate. For example, bank-runs generally start with a few people believing that the bank will no longer be able to keep their savings safe. Rumors are generally started with one or a few people inserting fragments of doubt or pieces of truth out of context. Economies generally fall because of one initiating event of mistrust amongst investors/citizens that lead to a domino train.
http://economistsview.typepad.com/economistsview/2008/10/informational-c.html
http://www.economist.com/blogs/democracyinamerica/2011/10/mass-movements