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Netflix and not Chill

http://money.cnn.com/2011/09/15/technology/netflix/

http://money.cnn.com/2011/10/25/technology/netflix_stock/

Information cascades are present everywhere in the world. They apply to things that we would never expect. For example, the 2011 Netflix stock fall was caused by an information cascade. Thankfully, Netflix is still alive and kicking company today and the information cascade was thankfully stopped. The cascade began when Netflix raised their price in September, 2011. This price is not due to Netflix’s greediness however, rather it was due to the increasing money demands from studios and threats to bring their content to Netflix’s large amount of rivals. An analyst has even predicted that Netflix’s licensing costs would increase 10 fold in just two years. Nevertheless, Netflix’s price hike caused almost 800,000 subscribers to quit the gigantic streaming entity. This caused investors to punish the company and resulted in an initial 19% drop. A few days later, the stock dropped further to 35% before slowly recovering.

The first drop occurred even though Netflix’s profits and leadership haven’t changed. The action of the investor selling their stock is an example of an information cascade. The investors sold stock because they saw that 800,000 subscribers quit. These subscribers quit not because they disliked Netflix or believed it would fail, they quit because the price hike didn’t agree with them. However, their quitting persuaded the investors to sell their stock and dropped Netflix 19%. The second drop in stock for Netflix is also the result of an information cascade. The initial drop of stock scared other investors into selling their stocks as well. These other investors had no new information to base their action by except the fact that a large number of other investors had already sold their stock too. Information cascades play a large part in the stock market economy. Since insider trading is banned, people have no private knowledge about companies so their decision is purely based on the actions of others and information the company itself provides.

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