Information Cascade

When ‘information cascade’ occurs it can lead to disaster. This is where individual herd members follow the actions of others. They make the same choices that others appear to be making, despite their own private reservations, and signals maybe receiving quite reliably. It’s a reliable process when the individual being imitated made a choice based on some information received and rationally deliberated upon. But it can go awry when everyone thinks that the herd members are making decisions this way but they are in fact making decisions based simply on imitating the actions of another. The whole thing comes around full circle ending up with decisions being made not because there is some useful knowledge circulating and directing the herd but by incestuous decision making based on nothing other than imitation unbeknown to the herd.

Surowiecki cites the example of from American naturalist William Beebe who came across a huge circle of ants in the Guyana jungle. They were just travelling in huge a circle about 350 metres in circumference. Biologist call this a “circular loop” Surowiecki explains, and it occurs when the ants get separated from their colony. They kept going around and around until they just drop dead, Beebe explained the ants have narrow job descriptions with narrow channel of information. The colony works because the ants are programmed to react and follow each other. However, when one breaks off in the wrong direction, and is not pulled back by another with better information and better direction, the whole colony maybe plunged in a circle of hell relying upon luck to avoid disaster.

Surowiecki points out that American economist and psychologist Herbert Simon, who is widely viewed as one of the most influential social scientists of the 20th Century, speculated that mimicry was so central to the way we lived that we must be genetically predisposed to be imitation machines.

The Herd Instinct, chased with euphoric hormones, is a cocktail that helped drive investment banks into a cavalier mentality in their mortgage based investments. Cash became increasingly available as result of selling these mortgage contracts, bringing forward their returns on mortgage deal from say twenty-five years to one year. This meant there was an abundance of money available for new, easy-in mortgage offers offered to all and sundry (including the notorious a subprime market) which fuelled property prices. This in turn led to hoards of ‘sheeple’ getting into getting involved in buying property using cheap mortgages, imitating adventurous speculators on programmes such as Property Ladder hosted by channel 4’s busty gravel voiced presenter Sarah Beeny. The result was a property bubble that had fed on itself and eventually had to burst. Lehman Brothers was the first to go and when it did it caused wide spread global banking contagion.