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Information Cascades in the Stock Market


“How to Think Like Warren Buffet: 5 Stocks that Berkshire Hathaway will Invest in Next.” Article titles just like these are posted all across the internet for individual investors and portfolio managers to peruse. Interestingly enough, information cascades are extremely prominent in the stock market — specifically called herd mentality. When a group of investors begin to buy a stock, other investors begin to catch on to the popularity and buy-into the stock based on the choices of previous investors. This is much more prevalent with more respected investors such as Warren Buffett. When Berkshire Hathaway invests into a new public company, other investors catch on immediately and purchase into the stock without a second thought simply because the stock “must be” a good buy since a trusted source has bought shares as well.

In relation to class, the information cascade is comparable to how a stock’s popularity among investors and portfolio managers may influence other investors to invest similarly. Moreover, the prominence and influence of well-respected investors such as Warren Buffett and portfolio holdings such as the one that Berkshire Hathaway holds is a clear example of a “social influencer” as mentioned in class. The choices of the prominent investor can change the choice of an adjacent investor from a “no” to a “yes” in terms of purchase of a stock. Another interesting relation is how the total effect of the network’s choices would be on the stock — as more investors are influenced to purchase the stock, the stock’s valuation rises and as fewer investors are influenced to purchase, the stock’s valuation lowers.


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November 2018