After reading about information cascades in the text, I searched recent articles written about this herd mentality, and came across several that attribute the recent housing bubble to this phenomenon. In an article appearing in the New York Times, Robert Shiller, an economist at Yale University, attributes the unawareness of the looming bubble to herd mentality. It was this inability to see the bubble coming that caused the recent destruction of financial markets in the United States and globally. Even Alan Greenspan, an expert on market conditions and movements, was blinded by the judgments and predictions of others rather than trusting his own information. Shiller writes, “Cascades can affect even perfectly rational people and cause bubble like phenomena - people sometimes need to rely on the judgment of others, and therein lies the problem.” Shiller contends that Greenspan and others suppressed their own opinions because of lack of confidence in their own predictions due to incomplete information. Information cascades ultimately begin due to incomplete information. Without complete information, which is incredibly rare in real world situations, one can never be sure of their own decision, and at that point become susceptible to falling into a herd mentality trap.  

Shiller further contends that houses reached unsustainably high values due to an information cascade among investors. Some home buyers ignored their own beliefs in the value of a house, instead falling victim to extraordinary values others placed on houses. This led to an escalation of home prices that caused the current bubble. As we have seen in other examples in class, often the information passed down this cascade is incorrect, whether intentionally (information from the National Association of Realtors), or unintentionally. In fact, in the original paper presenting the idea of information cascades, Sushil Bikhchandanii showed that the incorrect assumption is reached 37% of the time in such a cascade.

While this may not be the sole reason for the housing bubble or for the failure to see the bubble approaching, it is certainly an interesting and logical explanation. It will also be interesting to see how this effect will alter the future of the housing market. As we know, there is a significant amount of fragility inherent in any cascade. One theory is that this same herd mentality will now rebound to draw the value of homes below their true values.

http://www.nytimes.com/2008/03/02/business/02view.html?_r=2&ref=business&pagewanted=all&oref=slogin&oref=slogin