Information Cascades

Bikhchandani, Sushil; Hirshleifer, David A.; Welch, Ivo

Information Cascades

THE NEW PALGRAVE DICTIONARY OF ECONOMICS, Second Edition, Steven N. Durlauf and Lawrence E. Blume, eds., Palgrave Macmillan/U.K., 2008

Posted: 5 Oct 2008 Last revised: 29 Sep 2009

See all articles by Sushil Bikhchandani

Sushil Bikhchandani

University of California, Los Angeles - Anderson School of Management

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

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.

Suggested Citation: Suggested Citation

Bikhchandani, Sushil and Hirshleifer, David A. and Welch, Ivo, Information Cascades. THE NEW PALGRAVE DICTIONARY OF ECONOMICS, Second Edition, Steven N. Durlauf and Lawrence E. Blume, eds., Palgrave Macmillan/U.K., 2008, Available at SSRN: https://ssrn.com/abstract=1278633