Information Cascades

This paper describes how to set up a classroom exercise in which students see private signals and make public decisions in sequence, which provides an interactive framework that facilitates discussions of Bayes's rule, information, and social conformity.

Abstract

An information cascade occurs when individuals, having observed the actions and possibly payoffs of those ahead of them, take the same action regardless of their own information signals. Informational cascades may realize only a fraction of the potential gains from aggregating the diverse information of many individuals, which helps explain some otherwise puzzling aspects of human and animal behaviour. For example, why do individuals tend to converge on similar behaviour? Why is mass behaviour prone to error and fads? The theory of observational learning, and particularly of information cascades, has much to offer economics and other social sciences.