Sushil Bikhchandani

Sushil Bikhchandani is presented as one of the economists who first modeled the information cascade, a process in which people infer information from others’ choices and can end up collectively making the wrong decision. The model’s central warning is that a visible pattern of agreement may appear to pool what people know while actually concealing how little later decision-makers rely on their own information.

The Information-Cascade Model

Bikhchandani, David Hirshleifer, and Ivo Welch explain the cascade through a sequential choice between a new Indian restaurant and a new Thai restaurant. The Indian restaurant is objectively better, but each person receives only imperfect information about which is preferable; that information can point in the wrong direction. People therefore have reason to supplement their private evidence by watching the choices of those who decide before them.

The sequence matters. If the first diners happen to receive misleading information and choose the Thai restaurant, those who come later may interpret its growing crowd as evidence of quality. Even someone whose own information favors the Indian restaurant may follow the earlier choices, reasoning that the Thai restaurant’s popularity is informative. A chance error at the start can thus propagate into a group choice that is wrong despite later participants possessing contrary information.

Why Following Can Seem Rational

The model does not reduce a cascade to mindless trend-following or peer pressure. People imitate because they believe the actions they observe reveal something useful. As more diners choose the Thai restaurant, their decisions seem to provide evidence about which restaurant is better; the apparent signal can outweigh an individual’s imperfect private information.

At a certain point, following earlier choices can be rational for an individual: if people have comparable chances of choosing correctly and everyone before a decision-maker has chosen the same option, that shared choice appears to carry weight. But the inference becomes self-undermining. Later people believe earlier people acted on what they knew, while those earlier choices may themselves have been based on others’ actions. The crowd’s apparent evidence can therefore rest on a thin initial signal repeated many times.

Application to Plank Roads

The book applies the mechanism to nineteenth-century plank-road fever. Early roads seemed to solve a real transportation problem: they cut travel time between towns in half, could be used in any kind of weather, and helped small farmers reach markets beyond their previous range. The roads’ visible benefits made the innovation plausible, and each new road appeared to confirm that plank roads worked, while making alternatives seem less likely to be worth considering.

The eventual weakness was durability. Plank roads lasted closer to four years than the eight years George Geddes had promised or the twelve years some enthusiasts anticipated. Their short life made them too expensive for companies to maintain. By the late 1850s, they were no longer a transportation panacea, and by the end of the Civil War almost all had been abandoned, although a few persisted into the 1880s. By the time the underlying weakness became clear, construction had spread widely.

The Cascade’s Limits and Significance

For the book, the danger is not simply that a group copies a popular choice. A cascade can begin with genuine improvements and apparently reasonable judgments, then make the accumulation of choices look more informative than it is. Once people stop attending to their own knowledge and rely on what others have done, the sequence ceases to aggregate everyone’s information. It becomes a chain of choices based on assumptions about earlier choices, capable of directing a group toward a costly mistake.

The account also marks a boundary around the model. Bikhchandani, Hirshleifer, and Welch’s explanation gives early adopters influence because they act first and are observed by those who follow; it does not require them to be unusually influential individuals. The book contrasts this with Malcolm Gladwell’s account, in which particular kinds of people spread ideas through social ties. The distinction makes the cascade model’s claim precise: influence can arise from position in a sequence, even when no special authority or persuasive skill belongs to the people at its beginning.