Information Cascades and Observational Learning
Sushil Bikhchandani, David Hirshleifer, and Ivo Welch
September 2005
Abstract:
An information cascade occurs when individuals, having observed the actions and possibly payoffs of those ahead of them, take the same action regardless of their own information signals. Informational cascades may realize only a fraction of the potential gains from aggregating the diverse information of many individuals, which helps explain some otherwise puzzling aspects of human and animal behaviour. For example, why do individuals tend to converge on similar behaviour? Why is mass behaviour prone to error and fads? The theory of observational learning, and particularly of information cascades, has much to offer economics and other social sciences.
