The authors explain how rational people can ignore private information and follow earlier decisions, creating informational cascades that produce conformity, fads, booms, and crashes. Their model shows that collective behavior may rest on surprisingly little evidence, making widely shared choices both error prone and fragile.
A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades
Ivo Welch, Sushil Bikhchandani
51 Pages
Key Takeaways
Cascades Form Quickly: After only 10 individuals, the probability that no cascade has formed falls below 0.1%, even when private signals are extremely noisy.
Early Leaders Dominate: When adoption costs equal 0.5 and the best informed person acts first, every subsequent individual follows that initial decision.
Fads Exceed Fundamentals: With 90% accurate signals, cascade reversals occur with probability above 9.35%, nearly twice the 5% probability that the correct choice actually changes.
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