During the height of the Beanie Baby craze in the late 90s, throngs of buyers scooped up the little collectibles, hoping that their purchases might lead to future riches. The manufacturer’s plan to introduce a multitude of new characters to the Beanie Baby lineup led people to feel compelled to purchase as many as they could in the hopes that at least one of them might become rare and expensive, just as a Wall Street investor may buy shares of several promising IPOs. Unfortunately, interest in the toys ultimately waned, and so did the prices that they fetched at auction, leaving collectors with little plush animals that did little else than take up space.

Indeed, these hopeful collectors were victims of an information cascade. As we learned in class, if two people choose to do something because they think it is a good idea (i.e. they observed a high signal), a third, rational person will also choose to do it, regardless or whether he observes a high or low signal. In the case of Beanie Babies, many people bought them because they observed others doing so and assumed that it had to be a good idea, even if they personally did not see the appeal. Thus, it would have only taken a relatively small number of people who incorrectly assumed that collecting Beanie Babies was a good idea to start the cascade, eventually compelling scores of other people to buy them, as well.

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