Information Cascades in Reality
https://www.economist.com/blogs/democracyinamerica/2011/10/mass-movement
https://www.ft.com/content/6973e6d6-d047-11e7-9dbb-291a884dd8c6
“An information cascade, speaking loosely, is where people make decisions on the basis of their observations of other peoples’ actions. “
information cascade is a prevalent phenomenon in real life. Especially, such a cascade plays a very important role in stock markets. On October 26, 2011, the 17 leaders of the euro-zone countries met to prevent a cascade that would impart negative information about the value of government debt in southern European economies. The European stock markets were holding close to flat while the leaders were in their meeting, as is the spread on yields between Italian and German ten-year bonds. The prediction at the time was that if the leaders could not reach on an agreement, those spreads would jump. Traders would test the waters to see whether they could break the European Central Bank’s commitment to keeping spreads low by repurchasing bonds in the secondary market. If some traders shorted Italian debt successfully, others would follow and the prices would plummet. This can be explained and rationalized by the information cascade we learned in class. When people make decisions sequentially, later people are likely to watch the actions of earlier people and make decisions based on earlier people’s actions instead of following their own information. The traders who tested water are the earlier people, and after seeing what they did successfully, others would follow.
Another more recent example also shows the effects of information cascades: the sexual harassment scandal of the famous film producer, Harvey Weinstein. One major reason the Weinstein scandal snowballed so fast was digital informational cascades. In cyber networks, information can spread at lightning speed, beyond the control of lawyers or other traditional authority figures. Once one victim posts something online, isolated victims can immediately congregate into a crowd. In Weinstein’ case, the victims include film stars and other celebrities, who can make the information cascade even faster and wider. Digital informational cascades are so powerful that they can possibly overturn power structures.