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Abstract:
Macroeconomics deals with the behaviour of the economy altogether and concentrates on fundamental and actual economic problems. Microeconomics deals with the behaviour of individuals and the aggregation of their actions in different institutional frameworks. Thus, both micro- and macroeconomics are doctrines to describe and understand individuals' behaviour, activities and outcomes. So, why does one try to better understand? 'Individuals are curious', is a popular explanation. Another is that understanding may lead to a better outcome for individuals. There exist a lot of patterns of behaviour. One behaviour pattern is the so-called uniform behaviour. Imitation and mimicry belong to the basic instincts of every human being. Indeed, these patterns do not make immediate sense in terms of traditional macro- or microeconomic models. Still, they may be rational for an individual or a group of individuals. Learning by observing other individuals' past actions and decisions may be of help to explain some otherwise puzzling phenomena about human behaviour. Apprehending individuals' behaviour is not straightforward. It is not only profit or utility maximising that drives individuals' minds. Sometimes, individuals just act because others act. An Informational Cascade is a situation in which every subsequent individual, based on the observation of others, makes the same choice or decision independent of his private information. Informational Cascades are present in our everyday life and in fields such as Economics, Politics, Scientific Theory, Finance or Zoology. The fact that this phenomenon does appear in innumerable situations is my motivation to closer examine Informational Cascades.
Economics and above all economic behaviour is more than Statistics or Mathematics. It is Anthropology and Psychology as well.
To combine and describe economics with the behaviour patterns of human beings, above all Informational Cascades and its 'environment', is the base of my licentiate.
To link this phenomenon to economics and to bring it in an economic context, one has to grasp what exactly an Informational Cascade does describe. Why can one define an Informational Cascade as a gap between the practiced and the preached? Definitions and a simple example are given at the beginning of chapter two, followed by a characterisation of an Informational Cascade.
The characterisation deals with the brittleness, idiosyncrasy and the error-sensitivity of Informational Cascades. Cascades are not just good for theory; indeed they do appear in empirical contents. This is illustrated at the end of chapter two, followed by an important tool to understand Informational Cascades: Bayes' Rule.
The aim of chapter two is to provide the basics of Informational Cascades and to assure that the reader is prepared to conceive the periphery of this behaviour pattern.
Chapter three will deal with the crucial part of my work. It is dedicated to the dissection and classification of the literature dealing with Informational Cascades.
What areas, fields or realms influence and form Cascades?
This is the relevant question in the first part. One can subordinate Cascades to clusters such as Economics, Psychology, Sociology and others. In part two, I will dissect Cascades into well-known characteristics, specifications and theories, namely fads, fashions, herd behaviour, bubbles and crashes, and many others. I will also treat unorthodox phenomena such as the hush helix or the snob effect.
To show that an Informational Cascades' environment is variegated and complex is this chapter's assignment.
This is illustrated on the overview map at the end of chapter three.
I will analyse Informational Cascades in the context of financial markets, and show when and how frequently this phenomenon does occur.
This is the task of chapter four, where I illustrate that Informational Cascades appear within sequential and non-sequential contexts, i.e. when the ordering of individuals is endogenous or exogenous respectively.
For the probability to occur, the selection of the model to describe an Informational Cascade is crucial.
The innumerable ways individuals can understand and interpret the world, is another crucial factor affecting the probability for a Cascade to occur.
Questions in dispute are the relevance and consequences of Informational Cascades. Theoretically, the consequences are manifold. I will go into the effects of Informational Cascades on individuals, banks, rating agencies and financial markets. The last part of this chapter raises the question to what extent such behaviour patterns should be regulated.
Two thirds of my licentiate is descriptive, one third is reserved for mathematical calculations. The descriptive part consists of definitions, elucidations, comments, figures and burlesques. The mathematical modus operandi is dedicated to the modelling of Informational Cascades. Both components are appropriate and neither modelling nor describing in words is better or worse. They are simply two complementary approaches. Both procedures furnish the basis to satisfy the overall aim of this work: To let the reader enter the world of behavioural economics and to let him discover the terra of Informational Cascades with its multifarious environment. I will treat the immediate and intuitive periphery of Informational Cascades. This is mostly consistent with what authors are dealing with. I will for example not handle so called positive feedback or momentum investment strategies.
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