A very interesting question was asked in a previous lecture about whether or not people can see past choices. According to the results of an experimental study based on the Bikhchandani, Hirshleifer and Welch (BHW) model, many individuals do not in fact recognize cascade behaviors of others. The BHW model shows that in decisive situations where there is incomplete information, it may be rational to follow predecessors and to ignore our own private information.

In this experiment, a prediction game was run where one marble was selected out of 2 urns, and the subjects were asked to set prices on these games to maximize their income. Each participant was randomly placed in one of seven cascade positions. The subjects were able to see the decisions, pro or contra, of their predecessors, who were actually artificial agents of the experiment. The positions were divided up into three types: from position -3 to -1 no cascade has started, position 0 was where the cascade starts, and positions 1 to 3 are within the cascade. The focus of this experiment was on the price setting behaviors of the subjects, and how it was affected by their cascade positions.

The data collected showed that, for a majority of the subjects, as they are placed further in the cascade chain, whether they receive a high or low signal from their predecessors, their tendency to veer away from the choice established by the cascade decreases. And the longer the cascade, the more likely the subjects is to set a higher price. This price setting behavior shows that cascade behavior is not really recognized.

Although these cascade behaviors are rational, especially in the case like this experiment where people are trying to maximize their own personal benefit, they can be harmful especially since it has been demonstrated that people don’t often realize the presence of these cascades. If we do not realize the determinant of our decisions are the choices of others rather than what we feel is right for ourselves, then what we might perceive as the correct choice might do more bad than good.