Information Cascade in the Real World: Meme Stocks and Cryptocurrency
Throughout the span of 2021, the stock market has seen a variety of interesting occurrences, a few of the most notable ones being the sudden rise of GameStop and AMC stock, along with cryptocurrency–more specifically Dogecoin. In the article “Following The Herd: Meme Stocks and Bitcoin” by Randall Coleman, it was interesting to read about the intersection of social media and finance could lead to the popularization of meme stocks and bitcoin. In his work, Coleman discusses how the pandemic had essentially laid the foundation for this craze to occur, with many of those who participate in meme stocks having a newly claimed stimulus check and too much time on their hands. I found Coleman’s depiction of meme stock price movements as driven by human emotion, as trading for entertainment to be very agreeable. Similarly, the way meme stocks move in the market is also comparable to that of bitcoin, as the value of bitcoin, is also dependent on that of the willingness to pay of others.
This discussion of meme stocks and bitcoin ties back to what we learned in class about information cascades. An information cascade, as we’ve learned, is quintessentially when people make decisions based on the decision(s) of others, while simultaneously neglecting the knowledge they have of the decision being made. The rise in meme stock and bitcoin popularity can also be attributed to that of an information cascade, as stocks like GameStop and AMC didn’t gain much traction until people blew it up on r/wallstreetbets on Reddit. The rise in these stocks could’ve initially begun with one person, but as more and more people decided to buy (whether for entertainment value or just to bandwagon), these stocks rose at very quick speeds. The same can be said about Dogecoin, with Elon Musk being one of the more well-known proponents of the Doge cryptocurrency. Once Musk tweeted about the cryptocurrency, its value began to grow exponentially, with most people purchasing it disregarding what they know about Dogecoin. As we observed, the stock market and the world of cryptocurrency are highly susceptible to the occurrence of information cascades, as often, people will choose to follow other people’s purchases in the stock market because they’re afraid to take the risk of trusting the knowledge they have. To be fair, however, it is always easier to trust something, if everyone else around you trusts it.
Link: https://acmwealth.com/article-video/following-the-herd-meme-stocks-and-bitcoin/