Jumping on the Bandwagon

In this blog article, “Jumping on the Bandwagon,” Ian Cooper analyzes the rise and fall of the stock market, specifically, Black Monday, and how it occurred as a result of an information cascade among investors. A few investors may latch on to a bit of information and try to make a quick buck, buying an otherwise unimpressive stock, creating a snowball effect that drastically increases the price of the stock. Investors trying to make a short-term profit dump the stock as quicky as they had gotten it and send the stock plunging. And this is what happened on October 19, 1987, Black Monday.

The point of this blog article, is that these kinds of cascades can come from many sources, not just the outweighing of one’s own private information by the actions of two other people. A large investment can trigger this effect, as well as the dissemination of one small piece of information to a broad network of people by a weighted source, such as the media. With this knowledge, investors can try to profit from the market by trying to stay one step ahead of the cascades.

The rationale behind the quick buying and selling of a stock, and the resulting rise and fall of its value makes sense on the individual investor scale, whereas the investors in the cascade have no information of value other than previous actions. There is the added pressure of trying to buy the stock while it is still low, further speeding up the cascade. And just as easily as one rumor has investors clamoring for a stock, the stock can plummet when early investors decide to sell. This is slightly different, whereas in class we had discussed the effect of terminating/reversing a cascade at the present node, in the stock market, it is generally the earlier investors who started the cascade that also reverse it, by selling their stock while they’re ahead.

As long as individuals are concerned with their own self-interest, this type of market behavior is likely to continue as we all play the odds to find the next big thing.