Role of Information Cascades in Post-Election Stock Market Changes
The role of information cascades in post-election stock market changes
Stock markets prices, initially tanking after the results from Tuesday’s election, have seen a steady rise since Trump’s victory. The S&P 500 Index, one of the best measurements for indicating the strength of the US stock market, initially plunged 5 percent after the election results but regained all of the previous overnight losses and has continued to rise since Wednesday morning (according to the NY Times article). Many investors are betting on some of Donald Trump’s financial policies, which include an increase in government spending, a decrease in taxes, and an ease to financial regulations. Throughout this week, markets have continued to rise. While the increase could be explained with promising future market conditions, some of the increase to stock market prices could be attributed to a phenomenon called information cascades.
Information cascades are when people make decisions based on the observation of previous peoples’ actions. According to this theory, investors initially valuing stock higher (from increased demand) will cause later investors to also value stock higher. With the stock market and the easy availability of information, news, and stories, people are easily affected by minor changes in the market, which may lead to larger price changes in the stock market. Fluctuations in the stock price market are heavily reliant on news and stories. After the initial shock of the election, Trumps policies including increased government spending, lower taxes, and easing to financial and business regulations, led investors to increase the demand for stocks in specific markets – biotechnology and large financial institutions saw a large increase.
http://www.workmonkeylabs.com/social-media-networks-how-following-the-crowd-benefits-us/
http://www.economist.com/blogs/democracyinamerica/2011/10/mass-movements
http://www.nytimes.com/2016/11/10/business/dealbook/stock-markets-election.html?_r=0