Informational Cascades and the Financial Crisis

Mark Thoma posts an extract about Informational Cascades and the Financial Crisis from Wall Street's Lemmings, by Cass R. Sunstein, TNR.

To get a sense of how cascades work, imagine that a group of people is deciding whether to invest in real estate or instead the stock market. Assume that group members are announcing their views in sequence. From his own knowledge and experience, each member has some private information about what should be done. But each member also attends, reasonably enough, to the judgments of others.

The author wants to believe that things are so simple:

As behavioral economist Robert Shiller has shown, ... people were greatly influenced by a process of social contagion that amounted to an informational cascade. ...

This is just simplified version of the Tipping Point theory. My conclusion was:

For us Communists, the message is that the mass-marketing of selling the party newspaper and mass rallies is still important.

There are no short-cuts: no magic viral marketing campaign waiting to be unleashed once get to the right people. The tipping point is just an anarchist pipe-dream of an influential event that triggers a magical transformation of society. People can be panicked for a time but then revert to old habits.

As the evangelists keep pointing out, change starts from the heart and moves outward into the world.