Informational cascades in financial markets: review and synthesis

Purpose The purpose of this paper is to review recent contributions to the theoretical and empirical literature on informational cascades. Design/methodology/approach This paper reviews and synthesises the existing literature, methodologies and evidence on informational cascades. Findings Many financial settings foster situations where informational cascades and herding are likely. Cascades remain mainly an area of experimental research, leaving the empirical evidence inconclusive. Existing measures have limitations that do not allow for a direct test of cascading behaviour. More accurate models and methods for empirical testing of informational cascades could provide more conclusive evidence on the matter. Practical implications Outlined findings have implications for designing policies and regulatory requirements, as well as for the design of collective decisions processes. Originality/value The paper reviews and critiques existing theory; it summarises the recent laboratory and empirical evidence and identifies issues for future research. Most of other theoretical work reviews informational cascades as a subsection of herding. This paper focusses on informational cascades specifically. It distinguishes between informational cascade and herding. The paper also reviews most recent empirical evidence on cascades, presents review and synthesis of the theoretical and empirical development on information cascades up to date, and reviews the model of informational cascades with model criticism.

Karmic Cascades

The content ranking system of reddit.com, the English language Internet’s most popular social news website, plays a large but often unnoticed role in shaping what users see and how they think. By pairing informational cascade theory with textual analysis, I argue that the “karma” system elevates particular forms of content over others and generates numerical cues that unconsciously guide users’ judgments about said content and about the world. By drawing on Heidegger’s account of modern technology, I argue that the karma system both symptomatizes and engenders an ontological perspective according to which things in general are taken as available, evaluable, and disposable.

SEQUENTIAL CHOICE AND NON-BAYESIAN OBSERVATIONAL LEARNING

Standard models of observational learning in settings of sequential choice have two key features. The first is that players make decisions by using Bayes' rule to update their beliefs about payoffs from a common prior. The second is that each agent's decision rule is common knowledge, so that subsequent players can draw inferences about unobserved private signals from observable actions. In this paper, I relax the first assumption while maintaining the second. In particular, I look at observational learning by players who choose between two actions using nonparametric methods for estimating payoffs. When players are identical and make inferences using the maximum score method, an informational cascade and herd must result. If players of different payoff types use kernel or nearest-neighbor methods, there are cases in which a cascade need not arise. If one does occur, it must be one in which all players, regardless of type, choose the same action. In some situations, these alternative learning rules perform better than Bayesian updating.

Steht auf, wenn ihr Deutsche seid!

SummaryDuring the World Cup 2006 Germany experienced a surge of revealed patriotism unseen so far after World War II. How can this unexpected and spontaneous change of social behavior be explained given that preferences (for patriotism) are stable over time? This essay introduces and discusses three possible explanations: (i) patriotism as assurance game, (ii) patriotism as informational cascade, and (iii) patriotism as equilibrium in the threshold model of collective behavior.

The Dynamics of Informational Cascades: The Monday Demonstrations in Leipzig, East Germany, 1989–91

This article analyzes the dynamics of turnout and the political impact of five cycles of protest, consisting of forty-two mass demonstrations that occurred on Mondays in Leipzig over the period 1989–91. These demonstrations are interpreted as an informational cascade that publicly revealed some of the previously hidden information about the malign nature of the East German communist regime. Once this information became publicly available, the viability of the regime was undermined. The Monday demonstrations subsequently died a slow death as their informational role declined.