Information Cascade: Gamestop Incident
Information cascade has become more prevalent in society than ever before as the Internet provided the means for a faster, more effective communication platform for users. People are easily influenced by other people’s decisions as opinions and choices by others are easily accessible on the web. According to the textbook, an information cascade occurs when a sequential choice of information is decided by users where choices of users later down the road get affected by previous users.
One example of this concept is the Gamestop Reddit incident. Drawing information from the CNBC article, we can understand how the information cascade has shaped a significant shock to the investors and hedge funds at Wall Street. To briefly overview this incident, it first occurred when individual investors on an online platform called “Reddit” started gathering shares and call options to the GameStop stock for which the Wall Street investors piled short options for. In the article, Jim Paulsen, a chief investment strategist at the Leuthold Group, analyzed the effect of this incident as “retail investors with the help of technology acting as a union in attacking is a new phenomenon.”
This incident had a significant impact on Wall Street where individual investor’s effort congregated to make a huge output. This has very close ties with the concept we learned in class: information cascade. The initial choices of individuals on Reddit investing more in call options for Gamestop affected the choices of individual investors later on. The medium, Reddit, provided access for the platform users to access choices made by other people who chose earlier. The individual decisions all came to a single goal of investing more into Gamestop. Ultimately, this information cascade occurred at Reddit proved the extent of individual investors on the stock market.
Source:
CNBC News: https://www.cnbc.com/2021/01/27/gamestop-mania-explained-how-the-reddit-retail-trading-crowd-ran-over-wall-street-pros.html