Information Cascades and Observational Learning

Sushil Bikhchandani, David Hirshleifer and Ivo Welch

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

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.

Date: 2005-09
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