Introduction

Main Menu           Previous Topic                                                           Next Topic

What is an Informational Cascade?

"A Theory of Fads as Informational Cascades" poses a definition of Informational Cascades: "An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard for his own information."

In other words, when a perfectly rational individual obtains more information from the actions of those ahead of him than he could obtain from his own resources, he entirely disregards his own private information and follows the behavior of others. As a result, if the next individual is no better at obtaining private information, he will also follow the behavior suggested by the actions of others. The pattern continues indefinitely, unless some other process breaks the status quo.

It should be clear why such a sequence of events is called a cascade. Decisions of the first few individuals are analogous to the first several neutrons in a nuclear chain reaction, setting off a self-perpetuating sequence of similar events.

                   Previous Slide                                                           Next Slide