The Importance of Informational Cascades in Investor Behavior

Morgan Kelly's article on the likely extent of falls in Irish house prices was received with as much warmth and good humour as Martin Luther's 95 Theses pinned to the door of the Wittenberg Castle Church. In his book, Irrational Exuberant, Shilla notes that informational cascades are not a complete theory of bubbles, but they do have relevance for investor behaviour. As others make purchases at rising prices, more and more people will conclude that these buyers' information about the market outweighs their own. And that is how informational cascades can snowball.