Information Cascades Affecting Financial Markets
This article begins by giving background information about what is an information cascade and how they are formed. It is a theory that is used in behavioral economics a lot because it affects the decision making of many individuals based on what is happening around them. An information cascade is formed when an individual makes a decision purely based off of others making the same choice before them so they assume it is the right choice to make. The article points out that this can lead to erroneous behavior because when one is making their decision purely based off of others decisions, they are not adding any new knowledge to the topic or using their own rationale to make that choice.
It is discussed how informational cascades can occur in financial markets especially with regard to stock picks. When a certain number of individuals are confident and boasting about the stocks they’ve picked, it can lead to another individual choosing the same stocks purely because of the others before. This can lead to more and more people making the decision to choose the same stocks because of their neighbors all choosing the same ones. This could prove to hurt people in the long run by making bad decisions and not using actual knowledge in their decision making process.
Source: https://www.investopedia.com/articles/investing/052715/guide-understanding-information-cascades.asp