In a paper titled “Do Individuals Recognize Cascade Behavior of Others? An Experimental Study”, authors Tim Grebe, Julia Schmid, and Andreas Stiehler discuss the information cascade phenomenon and how it can affect people’s value of a choice, subsequently leading to information about people’s knowledge or lack thereof of their whereabouts in a cascade. I will go over the qualitative results discovered from this experiment and some questions that it has opened.

Much like the urn game in the previous assignment, this experiment sets up a game with two urns, A and B, with 3 black balls and 2 white balls in one and vice versa in the other urn. A ball is randomly chosen (signal) and the player decides which urn the ball comes from. In addition, there are artificial agents in place to select urns based on the principles of information cascades as discussed in a paper by Bikchandani et al to eliminate possibility of cascade errors. The main difference in this experiment from many others regarding the information cascade, is that the experimenters are more interested not in the pattern of signals or even in the player decisions of urn A or B, but in the value of money players are willing to pay to participate in the game and make predictions. The reason for this is that players will pay more if they think that they have a better probability of predicting correctly and they are also asked for their assignment of subjective probability that they are correct. For more detailed description, please see the paper.

Information cascade principles found in the Bikchandani paper would lead one to expect that players will continue bidding higher prices until a cascade starts, and once the cascade starts, the max price would stabilize and be equal for each prediction afterwards. In contrast, the experiment resulted in players continuing to increase the max price setting even in positions where a cascade has already formed (p8). The increasing maximum prices show that players learn from the guesses of other people before them, but don’t’ realize that those people are making guesses from observations of prior participants as well and may not know any better (p1). They are not consistently aware that cascade behavior has occurred.

Some questions one may wonder is what kind of subjects experimenters used and how this would affect results. In this case, experimenters used people with business and economics backgrounds. I started wondering if these participants learned about information cascades in their courses much like we are currently, and they still could not identify when a cascade began. On one hand, one would imagine in cases such as fashion fads or movie selections, one could tell if one was basing decisions on public or herd mentality. But it is interesting to see that people often don’t realize that even if many people prior to them have chosen something, that those dozens, hundreds, or even thousands most likely based their decision on many others before them who also did not have any more information of about the true value for the decision. The paper was interesting in zoning in on a subtle point, experimenters and those as “viewers” may know a cascade has started, but it may be difficult to actually realize when you’re in one.

Link to PDF file for the pages referenced

http://www2.wiwi.hu-berlin.de/institute/wt1/papers/2006/251006.pdf

Also see this paper for classic decription of information cascades.

SushilBikhchandani, David Hirshleifer and Ivo Welch. A theory of fads, fashion, custom and cultural change as information cascades. Journal of Political Economy. Vol. 100, pp992-1026, 1992.