Correction on the Origins of Informational Cascade Research

I was mistaken in an earlier post when I claimed that informational cascades research comes from the “heuristics and biases approach” in psychology. It definitely comes from behavioral economics.

Both behavioral economics and the heuristics and biases approach share common ancestry from the work of Herbert Simon. A genuine polymath, Simon won a Nobel Prize in economics for his theory of bounded rationality while also helping to give birth to modern cognitive psychology and making major contributions to the field of artificial intelligence. In the case of bounded rationality, Simon’s insight is that we cannot realistically expect that the human mind works perfectly rationally without regard to computational cost. Some rational calculations just take too much time and attention to be useful in real-world decision-making situations. Simon suggested that humans use mental short cuts that are good enough to get the job done most of the time and take far less time and energy than fully rational calculations.

Both behavioral economics and the heuristics and biases approach draw heavily on this insight. However, the specific work on informational cascades definitely came from the economists. The earliest references to them were in the following papers:

  • Abhijit V. Banerjee. August 1992. A Simple Model of Herd Behavior. Quarterly Journal of Economics 107:3, 797-818
  • Sushil Bikhchandani, David Hirshleifer, Ivo Welch. October 1992. A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades. Journal of Political Economy 100:5, 992-1026
  • Ivo Welch. June 1992. Sequential Sales, Learning, and Cascades. Journal of Finance 47:2, 695-732

For more info on the informational cascades literature, see this bibliography. For more info on the heuristics and biases approach, consider reading Heuristics and Biases: The Psychology of Intuitive Judgment

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About Michael Feldstein

Michael Feldstein is co-Publisher of e-Literate, co-Producer of e-Literate TV, and Partner in MindWires Consulting. For more information, see his profile page.
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