The stock market is one of the prime places to observe information cascades in action. Trading can be going along normally, then a seemingly unimportant piece of news breaks. A few traders, reading too much into the story, panic and start selling off shares of a big company. Hundreds more observe their actions and join in, and all of a sudden the market is down several hundred points at the hands of a small group of initial traders.

This is a chart of Google’s stock price from Jan. 29 to Feb. 7, earlier this year. You can see at the point labeled H, the stock price took a severe hit, falling to $495.43 from $564 in the space of only two days of trading. This rapid decline was precipitated by the release of the company’s fourth quarter earnings reports were released. Wall Street analysts precipitated a cascade by deeming the 17%, $1.21 billion gain to be insufficient and disappointing.

In the financial world, there are “layers” organized by how close people are to breaking information; by its very nature, this model leads to asymmetric private information. The law takes this so seriously, in fact, that it makes “insider trading–” with insiders being people at the most inner layers, with access to the “best” information – illegal, and charges the Securities and Exchange Commission with investigating abuses. If traders perceive that a few analysts are more “in the know” than they are, then the theory of information cascading informs us that this precipitous drop in the stock price was inevitable.

Don’t feel too bad for Google though, as information cascades work in both directions. This morning, after another such earnings report came back ahead of expectations, the stock was propelled upwards by almost $90. In today’s case, the analysis from Wall Street was overwhelmingly positive, and thus a natural cascade occurred. As an executive, one can only hope for more days like this.