The Theory of Information Cascades

People need to make decisions every day, and while some choices do not affect their lives, others can be critical. At the same time, a person often makes choices based on the experience or opinion of others, especially in conditions of limited time or information, and this leads to information cascades. Sometimes this approach can be useful for decision-making, but often it harms and force a person to make a wrong choice. I also had experience with information cascades, and in the case of buying a house, they helped me make the right decision, but in the case of attending work events, they harmed my career.

Information cascade theory is one of the explanations for human behavior, precisely the decision-making process. Hoch and Kunreuther (2004) note that information cascades arise in situations of uncertainty when information is insufficient or difficult to interpret. For this reason, people tend to trust others’ experiences if they separately come to the same solution. For example, most tourists choose restaurants to visit based on reviews on the Internet. The positive experience of many people demonstrates its quality, and it is impossible to get additional accurate information before visiting this restaurant. However, information cascades are often based on very little information and can, therefore, be detrimental to decision making (Hoch & Kunreuther, 2004). At the same time, in contrast to herding, information cascades are based on strong beliefs, so a person may not perceive signs that say the opposite to his or her vision (CFA Institute, 2017). For example, a large investor’s purchase of shares can encourage other investors to make similar investments, even if the profitability of this choice is questionable. Thus, the informational cascade can be beneficial or harmful for decision-making, depending on the context.

I have also faced information cascades, and they had positive and negative consequences for me. In the first case, I considered several options for houses to buy in different parts of the city. Both houses were good options with good locations; however, one of them had a lower price and was on the market for a long time. The real estate agent gave me the same information about both houses and neighborhoods, so I could not understand why the lowered price was lowered. However, after searching on the Internet and meeting friends who recently bought a house in the area where the more expensive house is located, I refused a cheaper option.

In this case, I was influenced by two information cascades, namely the example of friends and the fears formed by stereotypes. Although my friends did not give me new information about the advantages and disadvantages of the neighborhood, they helped me form a positive impression of their experience. At the same time, tips and blog stories said that I should not buy an undervalued house that has been on the market for a long time, since it probably has hidden problems. I did not have enough information to formulate my opinion; however, the information cascades helped me decide. Later I learned that the neighbors of a cheaper house cause problems for the entire street, so my decision was correct.

In the second case, the information cascades harmed my relationship with the boss due to the wrong decision, and this change affected my career. During the pandemic, our company held the necessary work meetings, training, and other events; however, employees could stay at home at will. Several meetings were essential to me, but I missed them because of fear of infection and the example of my colleagues who also missed several important events for them. However, I did not have enough information about their previous experiences or agreements with their boss and clients. In addition, I later learned that all the participants in the events used protective measures against the spread of the virus, and no one was infected.

However, the information cascade for me was the opinion of my colleagues who also missed events, and this decision did not affect their work, or, on the contrary, visited some of them but did not benefit. I followed the example of my colleagues, but for me, missing one event was more critical, which became the reason for the penalty and the reduction of my working hours. This situation occurred because my colleagues did not have enough information to make decisions for me, and I misinterpreted their situation.

The difference between the two cases is the availability of information from people whose experience I used to make decisions. The use of information cascades is rational if an informed person acts first, and an uninformed bang follows his example (CFA Institute, 2017). In the case of buying a house, I had limited information. However, the experience of people who made the mistake of purchasing property at a lower price, as well as the positive review of my friends, demonstrate that they had the information. At the same time, my colleagues did not know about my situation. I shouldn’t have to rely on other people’s experiences, but misinterpretation and beliefs, reinforced by an unwillingness to attend the event, pushed me to the wrong decision.

In conclusion, the theory of information cascades explains the reasons for making the right and wrong decisions based on the experience of other people. Understanding this theory allowed me to understand the causes of my success and failure in seemingly similar situations. On the other hand, the personal experience helped to understand more clearly the concept of information cascades and their influence on the process of decision making.

References

CFA Institute. (2017). CFA program curriculum 2018 level I. Wiley.

Hoch, S.J., & Kunreuther. H.C. (2004). Wharton on making decisions. Wiley.

Social Constructivism Theory in Education

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