Information Cascades
Why do trends sometimes continue long after the original reason for them has faded?
A move begins with a clear catalyst, but as time passes, the explanation becomes less precise. New participants join, not necessarily because they understand the original reasoning, but because others are already involved. The activity itself becomes part of the signal. Momentum builds, even as the foundation becomes less certain.
This is where information cascades begin to form. Rather than relying solely on their own information, individuals start to place increasing weight on the actions of others. Each decision is influenced not just by what is known, but by what appears to be known by the group. Over time, this can create a sequence where behaviour builds upon behaviour, rather than on independent judgement.
The concept was developed in economic research by Sushil Bikhchandani, David Hirshleifer, and Ivo Welch, who studied how individuals make decisions when they can observe the choices of others. In simple models, they showed that once enough people act in a certain way, later participants may rationally choose to follow, even if their own private information suggests otherwise. The cascade becomes self-reinforcing, not because everyone agrees, but because it becomes difficult to act against the apparent direction of the group.
In markets, this can be seen in the way trends extend beyond their initial drivers. Early participants act on information or insight. Later participants act on the behaviour of those participants. At some point, price movement itself becomes the dominant signal. The distinction between information and observation begins to blur.
What makes this difficult to recognise is that it does not feel irrational. Following the actions of others can be a reasonable response when information is incomplete. The challenge is that once a cascade forms, it can persist even when the original assumptions are no longer valid.
You may notice this in yourself when a decision becomes easier simply because others have already made it, or when acting independently feels unnecessarily risky. There can also be a point where the question shifts from “What do I think?” to “What is everyone else doing?” — and the answer begins to matter more.
Information cascades do not require strong information.
They only require enough people to act as if it exists.