Posted: 14 Nov 2005
Date Written: September 6, 2005
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: 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