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Information Cascades: Investing

This article begins by explaining what an information cascade is and how it works. It states that an information cascade is “situation where each person makes a decision/choice based on the observations or choices of others while ignoring his own personal information” and that individuals imitate the behavior of others. This is called her behavior and can result in correct decisions and erroneous ones. When an information cascade results in correct decisions, it is an up cascade and when it results in bad decisions, it is a down cascade.

The article provides a few examples of this in the real world. The most simple one is babies as they try to mimic adults around them. Then, the article points to marketing and argues that online reviews cause information cascades to develop. They are important in business strategy as competitors follow the actions of their opponents. A common example is placing items on sale after other businesses have done so.

The article then continues to explore information cascades in business by pointing to the stock market. A quote that exemplifies the main point in this section of the article is the following:

“People religiously follow the regulatory fillings of marquee investors and imitate them. The average guy thinks that the financial pundit has more knowledge and information than he does and imitates the pundit’s stock picks.”

Ultimately, this article is relevant to this class because it not only defines information cascades but also provides real world examples and explanations of the concept.

https://www.investopedia.com/articles/investing/052715/guide-understanding-information-cascades.asp

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