The Economist’s Democracy in America blog post called “Mass Movements, Information Cascades” applies the fundamentals of information cascades to world events and financial markets on a very macro scale. The Economist argues that the Arab Spring revolutions were partly caused by convalescing information cascades within and without revolting N. African countries that resulted in more N. African revolutions. Fundamentally, information cascades that cause revolutions – be they against governments or employers – are a result of too many successive citizens or laborers viewing the regime they are revolting against as weak. While this cascade worked in N. Africa, where the regimes were actually weak, they’ve been disastrous in Syria, where the regime wasn’t weak. In this circumstance, it would have been beneficial to interrupt the cascade by influencing public policy and opinion in the Middle East. This same type of cascade was responsible for the rise of communism in the Soviet Union.
Information cascades are also dangerous factors in financial markets. When stock prices and valuations are separated from the actual value of the company, the stock is driven and sustained by cascades. An increasing price will continue to increase because people think other people think the company is undervalued. Conversely, a stock that falls will fall at an increasing rate for the same reason. Historically, something similar happened during the Great Depression, when citizens ran on banks. The purpose of the FDIC is to prevent this type of cascade; by insuring deposits consumers are prevented from setting off a cascade of fear.
An interesting aspect of cascades is that certain emotions seem more likely to cause them than others. In class, we illustrated cascades using a very basic graph, but in the real world emotions make certain cascades more probable than others. For example, when people are afraid they will more readily imitate one another. Think of a fire; as soon as one person starts running from the building there is a resultant stampede. When people are secure and the issues at hand are relatively abstract, cascades are less likely to occur. In class, two consecutive students might offer the same opinions but the third might easily be contradictory. One thing we can take away from this is that if you want people to think critically (avoid cascades) you have to make them secure. So security begets more security, and insecurity begets more insecurity, or extremism.
This concept becomes interesting when you consider the cascading effects of relatively small events in history. Why did the United States have to fight a revolution for independence when Canada was able to slip into it? Did the Boston Massacre cause the American Revolution?