Information Cascades and Herd Behavior in the Stock Market
With it’s dramatic rise in popularity and nature of lowering the barriers and money required to invest in the stock market, Robinhood has revolutionized how people trade. While there are many benefits to providing this opportunity, it also can have negative impacts for some ill-informed traders, who base their decisions on what others are doing.
Internet forums such as Stocktwits and Reddit are both common sources of information for people to share stock news about, and although it is the responsibility of those investing to do their due diligence, this does not stop the propensity for information cascades and herd behavior to occur.
Some research related to this was written in a 2003 article titled, Herding, Information Cascades and Volatility Spillovers in Futures Markets. Here, the negative impacts of information cascades on the market are described as noisy signals “provide little certainty,” and “the probability that the herd arrives at an incorrect decision (such as failing to invest when they should) will be high.”
The newfound increased ability and ease to share knowledge makes it commonplace for some to deliberately try to inflate a stock’s price, just to short it and profit. The volume of people willing and able to flock to promoted stocks has great impacts. This great amount of signals shared, also contributes to how fragile the cascades and herding can be, as there are so many sources of information.
https://www.researchgate.net/publication/242579407_Herding_Information_Cascades_and_Volatility_Spillovers_in_Futures_Markets
https://seekingalpha.com/article/4354679-rise-of-robinhood-traders-and-implications