Information Cascades; Entry Written for the New Palgrave Dictionary of Economics

Posted: 14 Nov 2005  

Sushil Bikhchandani

University of California, Los Angeles - Anderson School of Management

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Ivo Welch

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

Date Written: September 6, 2005

Abstract

An information cascade occurs when it is optimal for an individual, having observed the actions and possibly payoffs of those ahead of him, to take the same action regardless of his own information. When there are informational cascades, society may reap only a modest fraction of the potential gains from aggregating the diverse information of many individuals. As a result, information cascades can help explain some otherwise puzzling aspects of human and animal behavior. For example, why do individuals tend to converge on similar behavior? Why is mass behavior prone to error and fads? We suggest that the theory of observational learning, and particularly of information cascades, has much to offer economics and other social sciences.

Abstract describes an entry written for: S. N. Durlauf and L. E. Blume, The New Palgrave Dictionary of Economics, forthcoming, Palgrave Macmillan. This abstract has not been reviewed or edited. The definitive published version of the entry may be found in the complete New Palgrave Dictionary of Economics in print and online, forthcoming.

Keywords: information cascades, information aggregation, social learning, cultural evolution

JEL Classification: D82, D83, G31, D23, K00

Suggested Citation

Bikhchandani, Sushil and Hirshleifer, David A. and Welch, Ivo, Information Cascades; Entry Written for the New Palgrave Dictionary of Economics (September 6, 2005). Available at SSRN: https://ssrn.com/abstract=844407

Sushil Bikhchandani (Contact Author)

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095
United States
310-206-2686 (Phone)
310-825-1581 (Fax)

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ivo Welch

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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