information cascade and financial crisis
http://www.starcitygames.com/magic/fundamentals/12201_Information_Cascades_in_Magic.html
In the early 20th century, American naturalist William Beebe saw a strange phenomenon in the forests of South America: a large group of army ants was walking around a circle of about 1200 feet. It takes about two hours for each ant to walk around. The ants walked around the circle for two days, and most of them died in exhaustion. Biologists call this phenomenon circular mill. Ants have a very simple biological characteristic: when they can’t find their way, they will follow the smell left by the previous ant. Ants don’t think, but they succeed in hoarding food, breeding and expanding fields. Such a simple behavior makes ants the largest number of animals on land. But sometimes this rule goes wrong, and the circular mill will make the whole group of ant dead.
Following the group is a behavior that reduces the cost of exploration and increases efficiency, so it has become the instinct of many animals, including human beings. In 1968, social psychologist Leonard Bickman and others made a small experiment. They asked a person on the street to look at the sky, which has nothing. In a minute, a few people stopped to see what was in the sky. The next day, he asked a group of five people to watch the sky, and the number of people who stopped increased fourfold. When 15 people are asked to watch the day together, 45% of people will stop. Another increase in the number of people can attract 80% of people to stop and look at the empty sky.
This instinct has caused disasters again and again in economic development. In the 19th century, there was no asphalt road in the United States. During long-distance transportation, muddy road often caused many problems. At that time, George Geddes, an engineer, thought of a way to lay two rows of planks on the road as tracks, and then collect tolls to make profits. The key to the profit of this method is the service life of these plank roads. Geddes believes that these trestles can be used for up to 8 years, and the additional maintenance can still be profitable. Therefore, a company was established to lay the first plank road in the United States. When it was launched in 1946, it was a great success. In ten years, there have been more than 1000 plank road operating companies in the United States. Unfortunately, the life of wooden plank road is only 4 years and it becomes a bottomless hole for losing money. It will take several years for this fatal injury to be exposed. Before that, when people saw others making a lot of money, they thought that wooden plank road would be the normal transportation in the future. In the end, all companies shut down.
We call this behavior “information cascade”. When there are more than a certain number of people, people will stop relying on their own knowledge and instead imitate the behavior of others, resulting in the wrong decisions of the group. In the financial market, this kind of thing happens more frequently, which is the essence and psychological source of the current global financial crisis.