Riots, sell-offs & cascades

There’s a parallel between the riots and the stock market sell-off. Both are examples of how social behaviour can shift from stability to instability.
There’s always some doom-monger trader who’s keen to sell.  Usually, though, his selling readily finds a buyer, so prices don’t move much.
Analogously, there’s always some nutter who wants to rob and trash places. But normally, his friends don’t go along with him, so he suppresses his tendencies.
In other words, when behaviour is uncorrelated - when sellers find buyers or when the lawless are surrounded by the lawful - we get stability. What we’re seeing now, though, is a higher correlation of behaviour. When sellers have tried to sell, they’ve run into other sellers - so prices have tanked low enough to lure out the buyers. And the lawless have found themselves accompanied by other criminals, so their behaviour has been encouraged rather than suppressed.
This is what Left Outside describes as a shift in equilibrium, from law-abiding to criminal behaviour and from stable-ish prices to unstable ones.
But what explains this? A big part of the story must be information cascades. These happen when people base their behaviour not upon their private information, but rather upon what others are doing. So traders think “others are selling, so this is no time to go long”. And some youth think “hey, those guys are getting away with a good ruck, I’ll pile in too.“ As Ian says, rioting is imitative behaviour.
This sort of story is a complement to attempts to explain the riots by reference to anger, deprivation, powerless or alienation. Such explanations run into a problem - that people have been angry, poor, powerless and alienated for years. So why are rioting now when they weren‘t for a long time? The answer is that an information cascade has led them to do so, whereas in the past such a cascade was absent. In similar fashion, financial markets can shift from having low volatility to high volatility because a cascade arises.
This story also contradicts a claim implicit in something Will says. He suggests that nudges and choice architectures are alternatives to neoclassical rational choice theory. In this story, though, they are complements. For the poor and desperate, rational choice gives (some of them) a disposition towards violence and looting; they have nothing to lose but their chains and a pair of trainers to gain. But whether this disposition leads to actual criminality depends upon nudges. And just recently, they have been nudged by their peers into thinking that they can actually get away with making trouble. So they do so.
Illuminating as the theory of information cascades can be, there is a problem with it. We cannot forecast when such cascades will emerge. We can only identify them in hindsight. They allow us to explain behaviour, but not predict it.
And perhaps this will always remain the case. I say so because of a recent paper by Klaus Adam and Albert Marcet, who show how only a very small information cascade can generate significant asset price volatility. This suggests that small changes in the extent to which we use public signals versus private information might lead to quite large changes in behaviour. Analogously, it implies that only small cascades can make the difference between peaceable behaviour and lawlessness.
Perhaps, then, social orders are more brittle than we like to think.

Comments

[Jimmy Hill]

I think this is a fair summary.

However, some of the explanation is missing. There are plenty of deprived, powerless and angry people. Why are these particular people rioting and looting?

I think Danny Finkelstein has a good go at the missing ingredient here: http://t.co/xCStYIb

Finally (and somewhat connected to Finkelstein's point) there are some people that just like violence and destruction and riots solve the coordination problem of indulging in this type of behaviour without consequence. To argue, as I have seen some do, that only socially excluded people riot therefore all the rioters must be socially excluded is to already have assumed your conclusion.

[Luis Enrique]

so it may make sense to say that the S&P downgrade 'caused' the sell off, in the sense of being a catalyst, and that the S&P downgrade had nothing to do with the sell off, in the sense that those selling share are worried about anything but the US government's credit rating.

[Bob]

Jimmy Hill

To be fair, isn't that what this whole article is about?

[Bob]

In any case, doesn't Finkelstein's explanation run into the same problem?

Ok, so young are more prone to violence. This seems to be true. But why are young men only in specific areas causing havoc? Why isn't it universal anarchy in the UK?

Chris suggests information cascades, and to me this seems to be a reasonably solid explanation.

[Jimmy Hill]

You're right Bob, Finkelstein doesn't explain it all, he just adds another layer.

My question is why do some people react to these information cascades and others don't, when they are equally marginalised, alienated etc. ?

I'm assuming there are some poor people who are marginalised that have not rioted.

[chris]

@ Jimmy Hill. Information cascades explain why some rioted and some didn't. It's all about the heterogeneity of private signals. Some people's private signals ("rioting's wrog", "I'll get caught") were strong enough to offset the cue provided by others' rioting. Other's private signals weren't so strong.

[Gym Equipments in Bangalore]

I say so because of a recent paper by Klaus Adam and Albert Marcet, who show how only a very small information cascade can generate significant asset price volatility. This suggests that small changes in the extent to which we use public signals versus private information might lead to quite large changes in behaviour.

[mulberry bags]

This post is awesome,ecpecting the newest!!!LIKE IT LIKE IT LIKE IT!!!