Modern economic theory has found a new field regarding pervasive social phenomenon. One of the examples is the information cascades which help to understand the real issues, such as the real estate bubbles and the financial crisis. The information cascades is simply (as in the textbook) “flowing the crowd.”

The article by Sunstein described it as “A group of people is deciding whether to invest in real estate or instead the stock market. In the process of exchanging their information and making judgments, if a person follows the other people’s decision regarding his/her information, then the person is in a cascade.” Examples of the information cascades could be found in everywhere such as Wall Street, fashion industries, local restaurants, and even high schools.

Sunstein explains the today’s economic crisis (serious losses in stock prices) is a result of cascade-driven pessimism. Behavioral economists have shown that people are “loss averse.” However, this result can be always overturn because the informational cascade is very fragile, since people’s decision does not depend on private information; once the public initiates the spark of shifting, the crisis could be reversed.

The information cascade has an important role in modern economy, and it could be found around easily such as entertainment industry, restaurants, fashion, real estate, and stock markets. The information cascade can also be related to webs. Ever since spread of internet usage, people exchange information through internet – new place where a cascade is initiated. Forums, feedbacks on products (examples of Ebay and Amazon), blogs, and reviews became the power of initial spark that initiate a cascade.

The information cascade also has impact on advertisement. People search on a certain item on web engine through a key-word. The companies would use ‘Keyword-Based Advertising’ to appeal their products more which would cause people to fall in a cascade. Now, the advertisers have to consider public psychology and social interaction to study where the information cascade is occurring.

‘Wall Street’s Lemmings’  by Cass R. Sunstein

http://www.tnr.com/politics/story.html?id=6a61c223-49f5-40f2-af65-90ec46e14a09