Information Cascades on Public Sentiment as it relates to the COVID-19 Pandemic.
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8486493/
Public sentiment has always played a pivotal role in investing. Media, in all forms, has played a key role in informing the public of impeding price action of stocks, bonds, and cryptocurrencies. An extremely vivid example of this is the public panic around the lockdowns and other regulations that drastically affect price action of stocks, bonds, and cryptocurrencies. This public panic and eventual crash in capital markets was a direct result of information cascades within all forms of communication among people: media, conversations, and all other forms of information dissemination. According to the linked article, public panic concerning a crash in capital markets was felt most prominently in the UK, United States, Germany, and China. Applying to the theory of information cascades to an individual within the public frenzy of COVID-19 is an interesting method to think about applied examples of information cascades.
You are deciding whether or not to sell an asset: option A is to sell the stock because you have private information sources saying there will be a crash. Option B is to hold the stock because it will remain a profitable company with good fundamentals. There is logic behind each choice; however, we have to consider how the actions of a large group will change individuals actions. A large signal from private information sources would indicate a sell while a low signal would indicate a non-sale. Given a large signal from his private information sources, it is likely that he would consider option A heavily depending on the number of unique private information sources. It is impossible to quantitatively asses the probability of selling without randomly guessing probabilities but the theory behind information cascades in this applied example works.
To further apply information cascades we can look at options the individual would have when the market crash did occur in early March. let’s theorize that the individual didn’t sell in the initial options and now they are on their computer watching his portfolio crash tens of percents very quickly. This person would then be left with another choice as a result of information cascades. Option A would be to follow the heavy selling pressure, while option B is to hold the stock because it will remain a profitable company with good fundamentals. The number of private information sources in the initial example is also far smaller than the number of sellers given the rapidly degrading price: this investor knows this. This example is more extreme example of the initial example simply replacing a few private information sources for thousands of public information sources in capital markets. If the seller didn’t sell in the first example then they will likely sell during the second example. Although this is not a wise financial decision, it follows along with human nature during a time of frenzy. Nevertheless interesting to think about financial decisions as it relates to an increased amount of possible influencers during a time of market frenzy through these two examples.