Mass Movements: Information Cascades
http://www.economist.com/blogs/democracyinamerica/2011/10/mass-movements
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0297.2010.02401.x/full
Speculation and hearsay construct models and implicit platforms of information cascades that often determine or set socioeconomic outcomes within our societal structure. Within this new age of information technology and heavy dependence upon information for decision making, the concept of information cascades is applicable to the interactions held on all bilateral levels from stocks to political voting. The article, “Mass Movements” by the Economist, with reference to John Fender’s study of information cascades in revolutionary regime transitions, outlines the underlying strength of information cascades prevalent in society.
The article first provides interpretation of information cascades in stock settings, exemplified by Netflix’s early share values. Stocks provide a good introspective look into how information cascades persist in technology-driven settings today. Netflix showcased reverse stock dynamics in which when stock prices fell, there were less shorts than most companies experience due to the high levels of momentum trading pushing through. This ultimately led to short interest going up rather than down as it would for normal companies, and traders kept adding onto the momentum to make more money. Stocks work on a simple setting in which when stock prices rise, people buy to keep driving the price up and thus adding more momentum and hype. When stock prices fall, people sell, which drive prices down and convince others to abandon ship if need be. Thus, amongst the broad range of investors ranging from laymen to high stakes traders, there is a heavy reliance on information provided by others, and individuals may subsequently decide to buy or sell depending on what course of action those before them decide to do. The second example outlined in the article deals with information cascades in historical political transitions to develop theories of political regime change spearheaded by the threat of revolution. As we discussed in class and discovered in several examples, information cascades rely on individuals making decision based off their observations of how other individuals acted or chose to do. The regime theory discussed how in historical settings, the working class would decide to or not to rebel against political regimes based off observations of other workers’ behaviors and signals that they may receive. As more people decide to rebel, information spreads and influences more individuals to join, and thus can create momentum to construct a successful revolution and overthrow a political regime.
The modern age of information technology showcases the rapid aggregations of both herd behavior and rising collective actions. The mass phenomena revolving around information cascades stems from the simple cascade model studied in class in which an individual views two states of the world, either good or bad. Individuals may observe to make inferences about these states and subsequently provide an action based off what they know. Applying this knowledge to real life situations, we can view how momentum can be created and large scale collective uprisings such as political revolutions or company hype is created through the diffusion and fast spread of information. As the spread of news and hearsay grows rapidly alongside the rise of information technology, information cascades only become a more relevant indicator and predictor for group behaviors.