Variations on Cascading Experiments and their Applications
Although information cascades can be made simple using an experiment of drawing marbles and guesses made by children, in reality it can be applied to much more elaborate experiments and connections to the real world. Information cascades occur when sequential decisions are made based on incomplete knowledge and public decisions of others, resulting in a herding or conformity among later decisionmakers. Early decisions are the most influential as a few identical decisions made in succession can lead to a cascading affect where future voters disregard their own private information and make decisions purely previous public decisions.
The effects of cascading can be shown in simple urn experiments described in class, with two probabilities determining if the current state of the experiment is “good” or “bad,” in which participants receive private information based on the current state. These experiments have been run several times with many different variations, however, one of which looked at how payoff affect a cascade’s results.
When Anderson ran an altered urn experiment so that payoff is only earned if the group’s decision, or majority, is correct, individuals were found to be more likely to reveal their private information to help subsequent participants make the correct decision, thus helping reduce conformity. Anderson and Holt also noted that it may be deemed necessary for experiments to issue monetary payoffs for correct decisions by participants in order to reduce the logistic error of each of their predictions. This is important to note because if we introduce the possibility of decision error made by previous individuals in the sequence, participants’ behavior will change as making decisions based on their unique private information becomes more attractive.
Another alteration to the experiment saw participants be rewarded when they agreed with the majority decisions (regardless of being correct), and as expected, this increased the trend towards conformity even more. This is useful in understanding today’s social norms and the propensity of people to imitate behavior. Often for decisions or alignments, correctness is not paramount, so people tend to quickly side with one argument and become inconsiderate of other perspectives, simply due to wanting to be part of a majority. This is briefly compared to simultaneous voting (particularly in court rooms) by Anderson and Holt; however, we can also see how cascades may result in bias before the voting takes place and thus causing downstream conformity. As we’ve seen with previous US elections and other popular debates, two divisions of people quickly form, often with a lack of wanting to understand the merit of the other side’s argument and becoming overzealous. This can in turn lead to a sense of community or acceptance between people shares similar beliefs, and further encourages them to conform to their own group when voting or making decisions in the future.
Additionally, the authors, even back in the 90’s, referred to the affects of cascades in investments, where one’s decision influence others and make everyone in the financial market trying to guess what each person is going to find attractive, or what might become popular. This can be evidently seen with the stock market in the past year, with stocks like GameStop and AMC having very little realistic value and growth potential, however, they gained huge popularity and massive stock growth due to a herd mentality and conformity to keep raising their prices. A less example of this can also be seen for Tesla’s stock, in which the company has recently surpassed a trillion-dollar evaluation, however, their current state of business and actual production and revenue provide no evidence to support such a high stock price. We can view Tesla as a company that many people want to believe in and want to grow, but a large portion of its evaluation is based on hope and speculation rather than real data and current performance.
https://wmpeople.wm.edu/asset/index/lrande/cascadehandbook