Satisfactory Essays
INTRODUCTION (information ‘inefficiency’ in financial market_ decision making ...) 1) General explanation of information cascades and mirages. An information cascade occurs when a person observes the actions of others and then, despite possible contradictions in his/her own private information signals, engages in the same acts. A cascade develops, then, when people “abandon their own information in favor of inferences based on earlier people’s actions”.[1] Information cascades provide an explanation for how such situations can occur, how likely they are to cascade incorrect information or actions, how such behavior may arise and desist rapidly, and how effective attempts to originate a cascade tend to be under different conditions.[2] One assumption of Information Cascades which has been challenged is the concept that agents always make rational decisions. More social perspectives of cascades, which suggest that agents may act irrationally (e.g., against what they think is optimal) when social pressures are great, exist as complements to the concept of Information Cascades.[3] 2) Experiences Description (how they test the presence of these phenomena) a. cascades (Diem) To examine the presence of information cascades, the authors of paper "Information cascades in the laboratory" applied the experimental method. They recruited 72 students from undergraduate economics courses at the University of Virginia who had no previous experience with this experiment. Each of the subjects will be paid $5 privately in cash at the end of the experiment to compensate for their participation. In each session which consisted of 15 periods, six subjects were decision makers and one was randomly chosen to serve as a “monitor” to assist the experimen... ... middle of paper ... Bayes’ rule. About two-thirds of the others (9 of 14) also did better than they would have with decisions based solely on private information. Several subjects seemed to disregard the information in others’ previous predictions, which is a plausible reaction to the possibility that others are making errors. [4] Generally, this experiment confirmed that individuals used information efficiently and followed the decisions of others when it was rational. There were, however, some errors, which tended to make subjects rely more on their own private information, The most prevalent systematic bias is the tendency for about a third of the subjects to rely on simple counts of signals rather than Bayes’ rule in situations where these imply different decisions. Overall, only a third of the deviations from Bayes’ rule in the asymmetric design can be explained by counting. [5]
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