Information Cascades in Real-World Professional Settings
https://www.cnbc.com/2019/10/16/billionaire-warren-buffett-most-surprising-business-lesson-he-didnt-learn-in-business-school.html
This article discusses the phenomena of information cascades and information based reasoning about said cascades. This article discusses the topics in a big business sense in how many executives, rather than make decisions solely based off of numbers and their own ideas, will make choices simply because a competitor is doing that thing. The author states how “companies tend to produce products that are extremely similar to those of their competitors.” And how they do this in “a blatant attempt to cash in on a trend and boost short-term earnings”. He goes onto discuss that these decisions are not based on rationality, but rather the desire to make money where you believe your competitors are making money, which is very similar to a cascade, in such that you don’t do something because of your signal, but just because everyone else is doing it, in this case, “everyone else” happens to be corporations. The author also reinforces this by quoting Warren Buffett, who said: “executives mindlessly imitate the behavior of their peer companies…no matter how foolish it may be to do so”. This clearly reflects the nature of a cascade, possibly even an incorrect cascade where everyone makes the wrong choice, “purely because everyone else is doing it”. The article continues to describe an incorrect cascade by stating how this nature of copying other companies’ choices can lead to everyone making the wrong choice and how “…you might all go down making the same mistakes.” An interesting point the author makes is how these cascades can be about literally anything, for instance, he says “it’s not just products, either — it’s branding, politicizing, team structuring” that all get copied and cascaded amongst corporations, since corporations assume if their competitor is doing one thing, then they should too.
This article is an excellent example of what we’ve been learning about with cascades, specifically incorrect cascades. As seen above, the author states multiple times how company executives often just copy other executives because they think that if company A is making this product, then they must be making good money, so I’m gonna have my company start making that product too. Then company B comes along and sees two others both making a similar product. Company B now thinks this really must be an amazing product and decides to also make it, again with little actual research, solely on the fact that their competitors are both making it. This is a very good example of an information-based cascade since the companies tell themselves “the other guys must know something that I don’t, that this is a great selling item, I’ll make it too then”. As discussed in the article this often leads to only short term gains because soon the market becomes saturated and the demand dies from so much competition. This can then also lead to an incorrect cascade which was also discussed. The author said how everyone may make the wrong choice based on everyone else, which is essentially what an incorrect cascade is. It’s when the cascade as a whole makes the wrong choice, so in this case, if all of the companies decided to make red cars, when in reality, nobody wanted a red car that year, everyone wanted a blue car, now all of the corporations made the wrong choice and have a ton of unsold inventory because they all based their choices on whatever one or a few companies were doing, which wasn’t right to begin with.
Overall I really enjoyed this article. I felt it did a wonderful job at describing cascades in a real-world professional scenario as well as describing the dangers of falling into a cascade, especially a wrong one, since as Warren Buffett said “Right is right, even if everyone is against it, and wrong is wrong, even if everyone is for it” which I think sums up the effects of incorrect cascades pretty well. It doesn’t matter if everyone is doing something, since as seen in a cascade, it may just be the knowledge/actions of the initial person/company, that have determined the outcome for the other however many people/companies that copied.