Thoughts to You from Yours Truly - ( TYYT ) - ( 94 ) - Information Cascades and Externalities
What makes a network tick is nothing but information. Therefore,
we must gain an in depth understanding of the nature and characteristics of this illusive
and intangible entity we call information before we are able to appreciate the essence of
the Science of Networks. Firstly, information is useful and orderly signals. Secondly, some
signals can be information to certain recipients but “ noises “ ( useless signals or
disturbances ) to others. It depends a lot on the user. For example, the irritating sounds
created in a mahjong game are noises to the bystanders but very pleasing and orderly
signals to the players participating in the game because the sounds signal the start of
another round of play which can bring them winnings.Thirdly, life itself is all about
information. Molecular scientists have come to the conclusion that the purpose for life to
perpetuate is to pass on the human genes which are, in fact, coded information. It does
not matter to the genes if the individual messengers like you and me die so long as the
genes in our bodies are passed on to the next generation. This natural calling as we all
know has given rise to the noble phenomenon of parental love and care for our children
and also the greatest all time human theme of true love between a man and a woman
which can be both inspiring and destructive. Even on a lower level of human affairs such
as our daily routines, information can mean a world of difference. What are the winning
lottery numbers for tonight ? What are the signs for a killer disease like cancer ? What are
the best jobs for a fresh gradute ? What are the best buys for a family car ? What makes a
good partner in marriage ? So, you will see that all aspects of our life whether they be financial, social, biological or even emotional operate on useful information. Fourthly,
information once given cannot be retrieved. It possesses a lot of Externalities. That is why
we should be most careful about how we handle rumours.
Returning to the Science of Networks, scientists have discovered that there are many external effects or simply called Externalities in the propagation of information within a given network. The technical term for this phenomenon is an Information Cascade. For those who are not students of economics, an Externality is a situation in which a person's economic activity is affected by things happening outside the transaction itself. For example, the costs of operating a radio station do not increase with the increase of additional listeners because the radio signals are on the airwave anyway and everyone can tune in without affecting the signals broadcast. This is called an external economy while pollution created by undisciplined industries is known as an external diseconomy. The costs of pollution are ultimately borne by society as a whole although the original polluting act was committed by the undisciplined industries with a greedy profit-making motive. These special conditions will call for unusual measures and regulations in order to ensure the efficient use and distribution of resources which are always scarce in the economic sense because there are an infinite amount of human needs while available resources are always finite in amount. This is the cardinal reason for studying economics in the first place.
Returning to the Science of Networks, scientists have discovered that there are many external effects or simply called Externalities in the propagation of information within a given network. The technical term for this phenomenon is an Information Cascade. For those who are not students of economics, an Externality is a situation in which a person's economic activity is affected by things happening outside the transaction itself. For example, the costs of operating a radio station do not increase with the increase of additional listeners because the radio signals are on the airwave anyway and everyone can tune in without affecting the signals broadcast. This is called an external economy while pollution created by undisciplined industries is known as an external diseconomy. The costs of pollution are ultimately borne by society as a whole although the original polluting act was committed by the undisciplined industries with a greedy profit-making motive. These special conditions will call for unusual measures and regulations in order to ensure the efficient use and distribution of resources which are always scarce in the economic sense because there are an infinite amount of human needs while available resources are always finite in amount. This is the cardinal reason for studying economics in the first place.
A simple description of an Information Cascade is this one thing
leads to another until the situation runs out of control and creates a self-perpetuating
phenomenon in its own right like a continuously thundering and unstoppable waterfall,
hence the term Information Cascade. This phenomenon appears to be highly paradoxical
because human beings are supposed to be rational in their decision making as our
common sense would traditonally indicate and are, therefore, not expected to act
irrationally like the flock of frightened sheep. Contrary to our common sense, the Science
of Networks has conclusively proven in numerous experiments that when people interact
in a network they stop behaving like rational individuals and would act more like a
collective entity. Remember the dictum “more is different”. For this particular reason, an Information Cascade can sometimes become a full-blown pandemic.
In the 1950s, social psychologist Solomon Asch conducted an experiment to prove what he called Coercive Externalities in the propagation of information. In effect, people can be forced to make a wrong decision against their own rational judgment if they are put under strong enough peer pressure. The experiment was conducted in the following manner. Asch showed seven participants in the experiment a flash card showing a single vertical 10 cm line on the left side of the picture and another group of three other vertical lines of 10cm, 12 cm and 14 cm, respectively on the right side in close formation. The participants were asked to point out which of the line on the right side had the same length as the single line on the left side. They were to shout out their answers aloud in turn. The first six participants were, in fact, dummies who were specially requested to give the same wrong answer which was the 12 cm line on the right side. The seventh participant who was the real subject of the experiment thought that what he presumed to be six other rational people could not have been wrong so he gave the same wrong answer against his own better judgment. He only confessed his true opinion at the end of the experiment when the identities of the other six dummies were revealed to him.
It is not just peer pressure alone that causes the Information Cascade to occur. In fact, acting in one's own rational interest can equally contribute to the cascade. The reasoning goes like this. In most real life situations, it is more often than not a case for a guessing game from the perspective of most decision makers because there is no perfect information as there is no perfect intuition. This is especially true when people act collectively as a group or network. One's own judgment counts as much as the judgments of others in the group. If I cannot be sure about what I think is right, I may as well look for some signs of other people's judgment on the common sense assumption that the majority should have a better chance of reaching the right decision. This is also known as Contingent Decision Making which means our decision can be dependent on that of others. This is also an important contributing factor to the cascade phenomenon. Thus, you can see how even following our common sense instincts can lead to a chaotic situation. However, this should not be taken to mean that we should not rely on our common sense. This may be the only decision making tool available to us in most everyday circumstances.
An Information Cascade does not automatically occur even when all the above factors are present in a particular network. We have to look to another concept borrowed from the Theory of Chaos for the ultimate reason of its emergence. This is the matter of history in the system in question. All cases of Information Cascades contain the above initiating factors but those factors do not always lead to the occurrence of cascades. They are the necessary but not sufficient conditions for the phenomenon. The sufficient condition lies in the attainment of the Critical Threshold or the Critical State which depends on the entire history of the system developing up to that particular point in time. Even as we are attributing the sufficient condition for the occurrence of an Information Cascade to the History of the system, we must not forget the fact that history itself is not some independent element that is self-created. Instead, it is definitely the product of multilateral human interactions between themselves and their social environment which is in turn created by the collective actions of the humans themselves. This myriad of interacting units that form the complex web of life is a stunning structure of the highest complication. It is a case of the most sophisticated form of non-linear interactions in the universe. That is why Karl Marx exclaimed that :- “ Men make their own history, but they do not make it under circumstances chosen by themselves.”
In the 1950s, social psychologist Solomon Asch conducted an experiment to prove what he called Coercive Externalities in the propagation of information. In effect, people can be forced to make a wrong decision against their own rational judgment if they are put under strong enough peer pressure. The experiment was conducted in the following manner. Asch showed seven participants in the experiment a flash card showing a single vertical 10 cm line on the left side of the picture and another group of three other vertical lines of 10cm, 12 cm and 14 cm, respectively on the right side in close formation. The participants were asked to point out which of the line on the right side had the same length as the single line on the left side. They were to shout out their answers aloud in turn. The first six participants were, in fact, dummies who were specially requested to give the same wrong answer which was the 12 cm line on the right side. The seventh participant who was the real subject of the experiment thought that what he presumed to be six other rational people could not have been wrong so he gave the same wrong answer against his own better judgment. He only confessed his true opinion at the end of the experiment when the identities of the other six dummies were revealed to him.
It is not just peer pressure alone that causes the Information Cascade to occur. In fact, acting in one's own rational interest can equally contribute to the cascade. The reasoning goes like this. In most real life situations, it is more often than not a case for a guessing game from the perspective of most decision makers because there is no perfect information as there is no perfect intuition. This is especially true when people act collectively as a group or network. One's own judgment counts as much as the judgments of others in the group. If I cannot be sure about what I think is right, I may as well look for some signs of other people's judgment on the common sense assumption that the majority should have a better chance of reaching the right decision. This is also known as Contingent Decision Making which means our decision can be dependent on that of others. This is also an important contributing factor to the cascade phenomenon. Thus, you can see how even following our common sense instincts can lead to a chaotic situation. However, this should not be taken to mean that we should not rely on our common sense. This may be the only decision making tool available to us in most everyday circumstances.
An Information Cascade does not automatically occur even when all the above factors are present in a particular network. We have to look to another concept borrowed from the Theory of Chaos for the ultimate reason of its emergence. This is the matter of history in the system in question. All cases of Information Cascades contain the above initiating factors but those factors do not always lead to the occurrence of cascades. They are the necessary but not sufficient conditions for the phenomenon. The sufficient condition lies in the attainment of the Critical Threshold or the Critical State which depends on the entire history of the system developing up to that particular point in time. Even as we are attributing the sufficient condition for the occurrence of an Information Cascade to the History of the system, we must not forget the fact that history itself is not some independent element that is self-created. Instead, it is definitely the product of multilateral human interactions between themselves and their social environment which is in turn created by the collective actions of the humans themselves. This myriad of interacting units that form the complex web of life is a stunning structure of the highest complication. It is a case of the most sophisticated form of non-linear interactions in the universe. That is why Karl Marx exclaimed that :- “ Men make their own history, but they do not make it under circumstances chosen by themselves.”
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