Information cascades have become one of the key aspects that characterize behavioral economics. These cascades exist in personal fashion choices, stock market, choosing courses, lane choice, rides at an amusement park, etc. The list goes on and on forever due to the simple idea behind human nature. Humans follow trends throughout life because it provides a “safety net” that keeps them secure. Although we all take risks in life from time to time, most of our actions are influenced by the popular majority. According to wikipedia, an informational cascade model has two key conditions: “people make sequential decisions with subsequent actors observing decisions (not information) of previous actors, and a limited action space (e.g. an adopt/reject decision).” In financial markets, information cascades based on certain investors can feed speculation and create cumulative price moves. An example could be a simple stock that gains attention from key investors who spark others to follow, and soon enough an excessive increase in price for that stock will occur. Another interesting point wikipedia made was that economists in the business lifestyle see information cascades as: “products of rational expectations at their start, and irrational herd behavior if they persist for too long, which signals that collective emotions come also into play to feed the cascade.”

According to the article named “Informational Cascades Prove Tipping Points Exist” by Dan Zarrella, Dan points out how informational cascades exist everywhere in our lives and that many of us are blind to them. In some extreme cases, we almost trick ourselves into thinking that we are making actions solely on what believe, but most of the time, the influence from the popular majority and the trends that are occurring hold the real truth behind our decisions. It was quite interesting how Dan put informational cascades in terms of evolution. Dan explained how humans from the past and present have realized that trial and error take time, energy, and resources that could be saved for more valuable purposes. While trial and error is potentially dangerous, it is a lot easier and safer to imitate what someone else has already proven to be beneficial or safe. This is why information cascades are everywhere in our society. Evolution has imprinted information cascades as part of human nature.

Another point that Dan Zarrella is trying to make in his article is that information cascades prove that tipping points exist. In lecture, the tipping point is the unstable equilibrium. In the dynamics of our market network, knowing the tipping point can help to predict the future number of users at some later time as a function of the current number of users. The tipping point is referred to as the unstable equilibrium because if the number of users surpasses the tipping point, then the number of users will increase. Otherwise, the number of users will decrease to zero. Therefore, the point that Dan brings up is that tipping points have to exist because our decisions are influenced by the choices and actions of others (information cascades). Since information cascade dynamics prove that the size of the participating population increases, tipping points will eventually occur.

Reference: http://danzarrella.com/informational-cascades.html