Social Proof and Information Cascades

When ten analysts you respect all own the same stock, it feels like evidence. It is not evidence. It is the same information, recycled through ten different voices — an information cascade that can drive prices far from reality while appearing to be the product of independent expert consensus.

Why This Matters

Information cascades occur when individuals rationally discard their own private information and follow the observable actions of others, because they reasonably assume others have information they do not. In markets, this produces correlated behaviour among investors who each believe they are acting independently — when in fact they are all responding to the same few visible signals. The cascade amplifies both market rises and falls far beyond what fundamentals justify, creating the extreme valuations that define both bubbles and crashes.