Tutorial: Informational Cascades

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Welcome to the Informational Cascades Tutorial.

Note: in order to run the dynamic simulations referred to in this tutorial, go here, to the Java Applet version. You will be directed to download the latest version of the Java plug-in.

This tutorial contains graphical representations of a formal game-theoretic model introduced in the paper, "A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades," by Bikhchandani, Hirshleifer, and Welch (The Journal of Political Economy, Volume 100, Issue 5, 992-1026). It also offers results of various experiments run on this model that both confirm and extend several predictions made in the paper. For a more in-depth discussion of the phenomena modeled here, please refer to the original paper.

TABLE OF CONTENTS

  1. Introduction
    1. Choosing Rationally
    2. Localized Conformity in Modern Societies
    3. What is an Informational Cascade?
  2. A Simple Example
    1. Identical Agents Acting in a Sequence
    2. How likely is a Cascade?
  3. Heterogeneous Agents in a Model
    1. Changing the Precision of the First Agent
    2. Effects of the First Agent's Precision
    3. Effects of Imprecise Beliefs about the Precision of an Agent
  4. Fragility of Cascades
    1. An External Infusion of Information
  5. Closing Remarks
  6. Appendix: Mathematical Details of Implementation
    1. Notation and Variables
    2. Derivation of an Agent's a Posteriori Knowledge
    3. Updating Rules for Public Knowledge
    4. Knowledge Types and Production Functions

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