Domino Effect in Information Cascade
When individuals with private information make sequential decisions after having observed the actions of those ahead of them, the actions of early individuals can influence the behaviors of later individuals. Information cascade is a phenomenon where later individuals follow the majority’s behaviors of the early individuals without regard to their own private information. As the first individual’s choice greatly affects the majority’s choice, it can propagate along the subjects sequence. The question is when and how the domino effect propagates forever. In this chapter, we study several simple models of information cascade and address the question. The memory length in the sequential decisions and the number of stable state (equilibrium) play the key role. Understanding the results can help readers to understand the micro-macro features of the information cascade experiments and the betting behaviors in a horse race betting market in later chapters.
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