Information Cascades in the Automotive Industry
Information Cascades are prevalent in the general world. From the restaurant you choose to eat at to the clothes you choose to dress in, you could be making a decision based on an information cascade rather than your own private information. Specifically, the automotive industry is deeply entrenched in information cascades that arise through personal consumer experience.
An information cascade examines the relationship between decision and rationale. More appropriately, an information cascade seeks to determine why a certain decision was made and how the information that led to the that decision was processed. To further elaborate, Barclay Palmer provides an example in her work Understanding Information Cascades in Financial Markets: “…an average person might think that a financial pundit has more knowledge and information than they do. Because of that, they imitate the pundit’s stock picks”. Now, this does not mean that all actions in a financial market are the result of an information cascade. In fact, the first investors of an IPO illustrate quite the opposite—they invest based on their own private information; however, others may imitate this. Information cascades, however, stem far beyond stock trading, they are prevalent in many financial markets.
The automotive industry is a crucial market in not only the United States but worldwide and thus its massive size and prevalence enables its to be looked at as a financial market of its own. In examining the automotive sector as a financial market, various vehicles are considered assets or investments, while their value is wholly determined by the cluster of consumers. Furthermore, Anastasia Belyh provides a hypothetical scenario of information cascading in the automotive sector in her work Who are Opinion Leaders and Why do They Matter, “In almost all cases, a car dealer will spoon feed you answers that will make you happy rather than bluntly tell you the truth. Their job is to sell and will do whatever it takes to sell a car. However, your friend knows cars very well and they will keep your best interests in mind”. While this casual conversation is fictitious in regard to the article, it is prevalent in reality. People are eager to find and determine other’s opinions on motor vehicles—becoming biased along the way. Instead of doing their own research and gathering their own private information to make the decision, prospective automotive consumers fall victim to information cascades.
Clearly, information cascades in the automotive sector are not always in the best interest of consumers as they are being manipulated in a sense—so what is the solution? There is no clear-cut solution to rid the automotive industry of information cascades simply because it is a part of the human archetype to have experiences and biases and to share those experiences and biases. Thus, the solution lays in the prospective consumer. The prospective consumer should gather all of the private information that they can to make their decision instead of solely relying on the anecdotes of others.
Sources:
https://www.investopedia.com/articles/investing/052715/guide-understanding-information-cascades.asp
https://www.cleverism.com/opinion-leaders-matter/