| Informational Cascade |
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A little bit of public information (or an unusual signal) can overturn a long-standing informational cascade. That is, even though a million people may have chosen one action, seemingly little information can induce the next million people to choose the opposite action. Fragility is an integral component of an informational cascade. There are two key conditions in an informational cascade model: #Sequential decisions with subsequent actors observing decisions (not information) of previous actors. #A limited action space (e.g. an adopt/reject decision). {Link without Title} EXAMPLES AND FIELDS OF APPLICATION Suppose that there is a crossroad where everyone must choose whether to go left or right. If a person goes the wrong way he will be eaten by a Grizzly Bear , but if he goes the correct way he’ll end up in safety. Unfortunately, people have imperfect information, so they’ll only be right 2/3 of the time. If person 1 thinks left, he will go left. If person 2 thinks left he will also go left. However, if person 3 thinks that right is correct he will go left anyway. This is because the combined information of observing person 1 and person 2 go left is greater than person 3’s private information that right is correct. Even if every other person thinks that right is correct, they will all go left based on the actions of the first two individuals. In this scenario society will usually go the correct way, but at least one out of nine times everyone will go the wrong way. Market cascades Information cascades have become one of the topics of Behavioral Economics , are for example they are seen rather often in financial markets where they can feed speculation and create cumulative and excessive Price Moves , either for the whole market ( Market Bubble ...) or a specific asset, for example a stock that becomes overly popular among investors. Information cascades are usually considered by economists:
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