I’ve never been comfortable with the concept of rationality in economics, at least, if rationality is defined as maximizing or minimizing a certain function, largely because maximizing and minimizing take effort, and people avoid effort (it is a bad not a good).? So when I read jive about information cascades, I roll my eyes.? Don’t get me wrong, I like Dr. Schiller; he’s a clever guy.? What is meant by information cascades is a sudden acknowledgment of things that were obvious, but ignored, because economic actors decided to follow the crowd.

Now, in the equity markets, momentum players can make money, but they have to cut their losses, and not stay at the game too long on any individual stock that is falling.? Houses are far less liquid than stocks, so the threshold to act is that much higher, plus for those that have mortgages, the leverage magnifies the pain when prices fall.? Thus people delay acting, and when they act, because a pain threshold has been crossed, they act all at once.

Is this an “information cascade?”? I think not.? It is more akin to “gunning the stops” in an equity market.? As prices fall, more people decide to sell to preserve some value, and prices go down more than anticipated.? It is not so much a question of information, but fear that drives the trade.

Information takes a different form.? Those who analyze their borrowings such that they know that it is unlikely that they will ever be forced to sell have genuine information.? They have sized their borrowings appropriately.? They are relying on the table model of stability, rather than the bicycle model (stable so long as you keep moving).

We don’t get dramatic moves in markets from information cascades, but from levered borrowers that are forced to sell for one reason or another.? These are borrowers that lacked information.? They became “informed” because of price moves that they did not anticipate.