Many of you may be familiar with the story of The Emperor’s New Clothes, or some adaptation of it. Different versions of the tale exist in a number of different cultures, but they are all similar in their plot and moral.
The plot summary is as follows: two “swindlers” appear at a kingdom, and offer to design and make a new outfit for the king. Their claim is that the clothes will be invisible to all persons who are incompetent or stupid. The king accepts the offer and agrees to pay the men a great deal of money for their services.
When the material is complete, the king sends one of his best men to view the clothes for approval. When the man does not see any clothes, he is convinced that he must be either incompetent or stupid, so he pretends that he does see the cloth to protect himself from ridicule. In reality, however, the men have just been hiding all of the materials and have not created anything at all. More of the king’s men follow the same process, until finally the king himself pretends that he can see the new material, and he allows the swindlers to fit him an outfit. The king then proceeds to parade around his kingdom, proudly displaying what he believes to be a breathtaking outfit, while actually not wearing anything at all. The townspeople, fearing that they cannot see the material because of their own faults, each pretend that they see the clothes and praise the material.
Finally, a small child sees the king and proclaims that he is not wearing anything at all. When the townspeople hear this from an innocent child, they realize that there exists no magical fabric, and the king is simply not wearing any clothes. The king and his men also realize that they have been tricked, but they complete the parade anyways.
This story demonstrates both the strength and the fragility of information cascades. When the first man views the swindlers working on the outfit, he has a private signal that the clothes are not there, but based on the observations of the two swindlers, he convinces himself that there is instead a fine material in front of him. Every person following him also takes into account all of the observations, actions, and discussion of everybody else who has already claimed to see the cloth. An information cascade develops, because everybody is convinced that other people can see the material, so it must exist. Finally, when the child ignores/does not notice the observations of those before him, he breaks the cascade, and only then does everybody realize the trick that has been played on them.
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