Mr. Market and Information Cascades : Networks Course blog for INFO 2040/CS 2850/Econ 2040/SOC 2090

Mr. Market and Information Cascades

In his famous book, “The Intelligence Investor,” Benjamin Graham conceptualizes a hypothetical investor called Mr. Market. Mr. Market invests in the stock market based on his emotions such as panic, euphoria, and apathy instead of using fundamental or technical analysis. Graham coined the idea that investors often make irrational decisions in regard to their investments, which can lead to the market being dangerously overvalued or remarkably undervalued. Interestingly, information cascades play a significant role in Mr. Market’s decision to buy or sell a security.

In 1989 the World Wide Web was created and then shortly released to the public. This new technology was destined to dramatically change the way humans interact, work, and share information with each other. Throughout the 2000s internet, software, hardware, and technology companies witnessed extensive publicity. This attention began to be reflected in the stock market and many stocks began to quickly provide investors with high returns. Individuals and nonprofessional investors increasingly bought stocks on speculation, euphoria, and the fear of missing out. Prices soared to unprecedented highs as the “get-rich-quick” fallacy became true—until March 2000. From 2000 to 2002 individuals sold off on extreme panic; the Nasdaq Composite lost 78% of its value as fantastic gains turned into horrendous losses.

The Dotcom bubble was created due to information cascades, spreading the excitement of ground-breaking technology and astonishing returns from investing in these companies. Mr. Market, first over-hyped the value of the companies due to the publicity and the news surrounding tech. Then Mr. Market, horrified, sold his shares of stock to prevent losing more money. Bubbles and crashes, seen throughout history, are amplified by emotion due to information cascades. These cascades are so powerful that it encourages Mr. Market dispose of their rational thinking and decide to ride the wave, until it crashes on top of them.