Information Cascades
Todd Kaplan
Restaurant
• You go to a unfamiliar city such as Tel Aviv.
• Where do you decide to eat?
– Restaurant A and B both look nice on the outside and
have a similar menu.
– A has a small crowd.
– B is empty.
– Which do you go to?
• Is this still the case when from the outside B looks
slightly better?
• How about if some clerk at the hotel said he
heard B was good?
Dance.
• You are at a dance.
• Some good-looking guy asks the woman next
to you to dance. She says no.
• He then asks another woman next to you to
dance. She says no.
• Now he asks you to dance. You say …
• Some not-so-good-looking middle-aged guy
asks you to dance first. You say …
Job Interview
• Haifa wants to hire an economist.
• Sam has a boring CV but we hear that he is
interviewing at Bar-Ilan and BGU.
• We decide we must have missed something and
give him a job talk.
• The talk is somewhat lame, but he is in a good
field. We hear that Bar-Ilan and BGU made him
and offer. In addition Tel Aviv is interviewing him.
• We decide to make Sam an offer.
Don’t look up.
• In the 60s, some experimenters had groups of
people 1-15 look up in the sky.
• They then watched to see if anyone else
looked up as well.
• With one looking up, most ignored him.
• With 5 looking up, many stopped.
• With 15, 45% stopped and kept looking up.
Information cascade
• In all these cases, decisions are made
sequentially.
• People deciding later can infer information of
those deciding earlier.
• A cascade develops when people deciding
later ignore their information relying on the
earlier information.
Information vs. Network.
• This relates to network externalities.
• Is a bestselling book pick up momentum
because:
– People like to read the same book.
– If so many people read a book it must be good.
Experiment
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•
•
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Two urns: B and R.
B contains 2 blue balls and 1 red ball.
R contains 2 red balls and 1 blue ball.
Person 1 privately sees one randomly drawn ball.
He guesses which urn.
• Person 2 privately sees one randomly drawn ball
AND what person 1 guessed. She guesses which
urn.
• Etc..
What should happen.
• If person 1 sees R what does he choose?
• If person 1 sees B what does he choose?
• If person 2 sees 1 choose R and sees R what does
she choose?
• If person 2 sees 1 choose R and sees B what does
she choose?
• If person 3 sees 1 choose R and 2 choose R and
sees B what does she choose?
• Does this ever stop?
Bayes’ Rule
• P(A|B)=P(A & B)/P(B)=P(A)*P(B|A)/P(B).
• What is the prob of the urn being B given
sequence B?
• What is the prob of the urn being B given
sequence BB?
• What is the prob of the urn being R given
sequence BB?
• What is the prob of the urn being B given BBR?
• What is the prob of the urn being B given BRBBR?
Breaking a Cascade
• What do you do if you see the following
sequence:
• BBBBBBBBBBBBBBBBBRR and then get an R.
Information Cascade
An information cascade starts if there is
too much variance from the average.
Lessons
• It is rational to look at the decisions of others.
• Cascades can be wrong.
– Opposite of the Wisdom of Crowds effect.
• Cascades can be based on very little
information.
• Cascades can be fragile.
• Financial crisis.. Could causes have been an
information cascade? People ignore common
sense because everyone else does.