Information Cascade

Information Cascade

An information (or informational) cascade occurs when people observe the actions of others and then make the same choice that the others have made, independently of their own private information signals. A cascade develops, then, when people “abandon their own information in favor of inferences based on earlier people’s actions”. Information cascades provide an explanation for how such situations can occur, how likely they are to cascade incorrect information or actions, how such behavior may arise and desist rapidly, and how effective attempts to originate a cascade tend to be under different conditions. By explaining all of these things, the original Independent Cascade model sought to improve on previous models which were not able to explain cascades of irrational behavior, the fragility and/or short-lived nature of certain cascades.

There are four key conditions in an information cascade model:

1. Agents make decisions sequentially
2. Agents make decisions rationally based on the information they have
3. Agents do not have access to the private information of others
4. A limited action space exists (e.g. an adopt/reject decision).

One assumption of Information Cascades which has been challenged is the concept that agents always make rational decisions. More social perspectives of cascades, which suggest that agents may act irrationally (e.g., against what they think is optimal) when social pressures are great, exist as complements to the concept of Information Cascades. While competing models exist, it is more often the problem that the concept of an information cascade is conflated with ideas which do not match the two key conditions of the model, such as social proof, information diffusion and social influence. Indeed, the term information cascade has even been used to refer to such processes