This article written by Robert Shiller featured in the NY Times tries to explain why experts, such as Alan Greenspan, were unable to detect the housing bubble that was forming in the 1990s. The article reports that because of the failure to recognize and address the housing bubble, financial markets in the US and abroad are paying the price. It was not that all the experts were “stupid,” it was that all these perfectly rational people got caught up in the bubble. More specifically, information cascades lead the people to make some serious mistakes. Shiller found that “cascades can affect even perfectly rational people and cause bubblelike phenomena [because] people sometimes need to rely on the judgment of others, and therein lies the problem.”

This statement definitely summarizes an idea touched upon in class, that experts and/or specialist may very well “get on the bandwagon” and follow the trends of the times because of information cascades. The fundamental problem is that the information obtained by any individual is bound to be incomplete and once a cascade begins, it drives our thinking and our rational.

Another main point of the article that was raised, which I think was key, was that information cascades challenge the “efficient markets” view of the world. This idea assumes that “investors are like independent-minded voters, relying only on their own information to make decisions.” However, we now see that information cascades, which do happen in real world situations as the housing market, contradict this idea. Although this idea was not specifically touched upon in class, I think this certainly brings about new questions and extensions to what we have covered.