Living Economics

Because it is costly to do original research before making decisions, most of us simply observe the actions of those ahead of us and join the bandwagon. When it is optimal for an individual to follow the behavior of others without regard to his own information, an informational cascade is said to have occurred. When an informational cascade leads to the adoption of a new idea, it is said to be an 'up cascade'. Rumors are essentially up cascades. And when it leads to rejection, it is known as a 'down cascade'. But sometimes neither happens. When the private information of one individual does not update the information of another, no cascade occurs.

Informational cascades are most likely to be formed in the absence of reliable information and when followers are not subject to severe and certain penalty from threatened vested interests (cf. Private Truths and Public Lies.). The most common examples are garment fashions (remember bell-bottom pants?) that come and go in rapid successions. Here the vested interests (namely fashion designers and garment manufacturers) are in favor of fast changing fads that encourage consumers to change their wardrobes constantly. Fashion cascades illustrate how easy it is for innocent victims to be swept along with fashions that obviously accentuate their body defects.

Because informational cascades are built not on informed individual decisions, the sequence of adoptions or rejection of the first movers determines whether there is a cascade and the direction of the cascade. The imputed reputation of the first movers is also critical whether a cascade results. That explains why celebrities from one unrelated field are often hired at great expenses to promote a product that they may not even consume.

Since people in an informational cascade are not very sure that the cascade is correct in the first place, they shift their allegiance at the slightest provocation. This provocation could be in the form of public information disseminated by a trusted source. Such a reversal may not be possible if habituation or addiction sets in after joining an informational cascade. For example, teenagers might have started smoking because it is fashionable to smoke. But once they get addicted to smoking, they may not be chemically able to kick the habit even in the face of incontrovertible health warnings from the U.S. Surgeon General.