A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades
TL;DR
Mathematical proof that rational herding creates fragile consensus—a few early movers can lock in mass behavior, but a single contrary signal can shatter it.
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Foundational paper explaining why rational individuals ignore their own information to follow crowds, and why mass behavior is both contagious and fragile. Essential reading for understanding market bubbles, viral adoption, organizational groupthink, and the structural vulnerability of consensus-driven decisions. This work anchors the book's treatment of signaling and collective behavior—connecting human herding to biological swarm dynamics. Cited over 10,000 times and foundational to behavioral economics.
Key Findings from Bikhchandani et al. (1992)
- Cascades form after just 2-3 decisions when individuals observe actions but not private information
- Rational actors optimally ignore their own signals once cascade probability exceeds their private signal strength
- A few early movers disproportionately determine mass behavior—cascade length can be infinite based on just two decisions
- Cascades are inherently fragile—agents are near-indifferent, so small public signals trigger complete reversal
- Conformity emerges from rational response to incomplete information, not from irrational actors
- Research shows cascades occur on roughly 12-20% of high-volatility trading days (more frequent in sell-offs)