How Does “Information Cascade” Differ from the Herding Effect in Financial Markets?
The herding effect is driven by emotional and psychological factors, where investors follow the crowd out of fear or greed, often ignoring their own information. An information cascade, however, is a rational decision-making process.
It occurs when investors, seeing the actions of others, rationally conclude that the initial actors must have superior information. They then disregard their own private, less certain information and follow the trend, leading to a potentially misinformed consensus.
Glossar
Information Cascade
Propagation ⎊ Information cascades, within cryptocurrency, options, and derivatives markets, represent a sequential decision-making process where individual traders observe the actions of others, potentially leading to herding behavior irrespective of private signals.
Herding Effect
Momentum ⎊ The herding effect, particularly within cryptocurrency derivatives, options trading, and broader financial derivatives, describes the tendency of market participants to mimic the actions of others, often amplifying price movements and creating self-fulfilling prophecies.
Herding
Convergence ⎊ Herding, within cryptocurrency, options, and derivatives, manifests as a pronounced tendency for trading behavior to cluster, driven by shared information or sentiment, often amplifying market movements beyond fundamental valuations.