Informational cascades in financial markets: review and synthesis

Abstract

Purpose The purpose of this paper is to review recent contributions to the theoretical and empirical literature on informational cascades. Design/methodology/approach This paper reviews and synthesises the existing literature, methodologies and evidence on informational cascades. Findings Many financial settings foster situations where informational cascades and herding are likely. Cascades remain mainly an area of experimental research, leaving the empirical evidence inconclusive. Existing measures have limitations that do not allow for a direct test of cascading behaviour. More accurate models and methods for empirical testing of informational cascades could provide more conclusive evidence on the matter. Practical implications Outlined findings have implications for designing policies and regulatory requirements, as well as for the design of collective decisions processes. Originality/value The paper reviews and critiques existing theory; it summarises the recent laboratory and empirical evidence and identifies issues for future research. Most of other theoretical work reviews informational cascades as a subsection of herding. This paper focusses on informational cascades specifically. It distinguishes between informational cascade and herding. The paper also reviews most recent empirical evidence on cascades, presents review and synthesis of the theoretical and empirical development on information cascades up to date, and reviews the model of informational cascades with model criticism.