Information Cascades, should it be followed in the Financial Market?
https://www.koreaherald.com/view.php?ud=20220512000691
https://forkast.news/headlines/south-koreas-crypto-market-capitalization-drops-60-in-six-months/
Information cascade is when an individual makes a decision based on the decisions of other people, while ignoring their own personal information. These types of behaviors can be observed in various real-world scenarios such as the Financial Market.
It is nothing new when it comes to the observation of information cascades in the financial markets as there were many cases that led to the economic boom and busts throughout the years. One of the most common examples of an information cascade playing a role in the financial market is when one individual think that another financial investor is more knowledgeable about the current trends and market, therefore following the investment decision of the other person.
This example was the case for when first cryptocurrency became a center of attention for those who wanted to get rich quick (one of the worst mindsets to have especially when you want to get rich) in South Korea in early 2022. People at first were not so familiar with the concept of digital currency, until in 2018, Bitcoin started to surface around people’s attention and in the news. However, as Bitcoin and other prominent cryptocurrencies such as Ethereum price went up, people were desperate to get in the hype in the hopes of making profits.
Nonetheless, the problem was that majority of the people that joined the cryptocurrency hype were not as financially literate as the common investors in the stock market. Majority were beginners with no knowledge of financial terms or strategies; what they did was just blindly follow what other people told them was a good cryptocurrency or not. Due to this the cryptocurrency market in South Korea boomed for couple of months. But as the financial market is designed to allocate the resources to the most efficient users, this golden age of cryptocurrency shut down automatically as cryptocurrency scams surfaced the web and the news. Multiple incidents of cryptocurrency companies scamming their investors and as cryptocurrency gradually was shown as a commodity that’s unreliable as economic uncertainty surged, the cryptocurrency market plummeted, ultimately leaving significant damage to a lot of investors.
From this, we are able to see the impacts of information cascade in the financial market and it’s not always wise to do something because others are doing it. I believe it is best to accumulate your knowledge to the point where you can either decide on what’s a good choice to make and what’s not.
To talk a little bit about my experience, I was one of those late investors to cryptocurrency compared to my peers. Peers around me would always tell me to get in the hype as well but I generously declined as I did not know anything about it, and knew for sure that it’s always not the best to invest in something you are not interested or knowledgeable about (Shout out to Robert Kiyosaki). However, after my dischargement from the military, I studied about cryptocurrency and blockchain to see what the hype was all about. After accumulating my knowledge in the field, I thought that I had enough personal information to decide to invest in Ethereum.
I invested the money I earned during my military service in Ethereum on February 22, 2022. With my accumulated knowledge and from my personal information, I have generated a negative profit of 43%…
Making decisions based on other people’s decisions can be unwise but I shouldn’t have totally trusted myself either…
Ha ha Ha.