Informational cascade

An information (or informational) cascade occurs when a person observes the actions of others and then – despite possible contradictions in his/her own private information signals – engages in the same acts. A cascade develops when people "abandon their own information in favor of inferences based on earlier people's actions". Information cascades provide an explanation for how such situations can occur, how likely they are to cascade incorrect information or actions, how such behavior may arise and desist rapidly, and how effective attempts to originate a cascade tend to be under different conditions. By explaining all of these things, the original Independent Cascade model sought to improve on previous models that were unable to explain cascades of irrational behavior, a cascade's fragility, or the short-lived nature of certain cascades.

There are five key conditions in an information cascade model:

One assumption of Information Cascades which has been challenged is the concept that agents always make rational decisions. More social perspectives of cascades, which suggest that agents may act irrationally (e.g., against what they think is optimal) when social pressures are great, exist as complements to the concept of Information Cascades. While competing models exist, it is more often the problem that the concept of an information cascade is conflated with ideas which do not match the two key conditions of the model, such as social proof, information diffusion, and social influence. Indeed, the term information cascade has even been used to refer to such processes.

Information cascades occur when external information obtained from previous participants in an event overrides one's own private signal, irrespective of the correctness of the former over the latter. The experiment conducted in is a useful example of this process. The experiment consisted of two urns labeled A and B. Urn A contains two balls labeled "a" and one labeled "b". Urn B contains one ball labeled "a" and two labeled "b". The urn from which a ball must be drawn during each run is determined randomly and with equal probabilities (from the throw of a die). The contents of the chosen urn are emptied into a neutral container. The participants are then asked in random order to draw a marble from this container. This entire process may be termed a "run", and a number of such runs are performed.

Each time a participant picks up a marble, he is to decide which urn it belongs to. His decision is then announced for the benefit of the remaining participants in the room. Thus, the (n+1)th participant has information about the decisions made by all the n participants preceding him, and also his private signal which is the label on the ball that he draws during his turn. The experimenters observed that an information cascade was observed in 41 of 56 such runs. This means, in the runs where the cascade occurred, at least one participant gave precedence to earlier decisions over his own private signal. It is possible for such an occurrence to produce the wrong result. This phenomenon is known as "Reverse Cascade".

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