Mass Movements: Information Cascades
The following article depicts how information cascades can have a major impact on both financial crises of particular securities/financial systems and how they can incite political turmoil in particular areas. The first part of the article recounts an event where the stock Netflix exhibited a reckless appreciation in value that came about from an information cascade. As people continued to bid up for the stock, others saw bullish signals from the price movement and begin to bid up for the company as well. This causes a massive pricing bubble in the stock. Eventually, the momentum shifts and the share price begins to plummet. This ALSO exhibits and information cascade, because in times of severe downward pressure in prices, people tend to follow the bearish signals of stock too much and suddenly the price of the stock is lower than it should be. The same tendency can be seen in the midst of political revolution. As a person with rebellious thoughts receives signal from others that a revolution is about to happen, they too revolt and more and more people begin to tack onto the impending power struggle. Eventually, there is enough resistance to the point where there is an overturning of a regime.
This article relates to what we have been talking about in class about information cascades and what we have been speaking about regarding decision making in crowds. It is quite similar to the problem in the homework pertaining to high and low signals. Once a few weak signals in a row have occurred, it is EXTREMELY hard to break a cascade by accepting the signal instead of rejecting it. In the case of a financial crisis, as the market continues to exhibit bullish tendencies, it is extremely hard to read between the lines and make the independent decision to short the market instead of continue to long it like the rest of the investors. Anyone who did have the foresight to short the market in the months leading up to the dot com crisis and Great Recession made the correct choice by rejecting the previous signals of market goers.
Link: http://www.economist.com/blogs/democracyinamerica/2011/10/mass-movements