REDISCOVERING INFORMATION CASCADES. Do you stop at the truck stop where all the trucks are because that's a signal the food is better? Newmark's Door links to a column that rediscovers the information cascade. (The parking lot is full because the first trucker made a choice, the second trucker matched the first choice, repeat as necessary.) The article, which has a fun information cascade simulator, and links to others, explains,

So, just because one restaurant is crowded and its neighbors have few customers doesn't necessarily mean that the packed bistro is the place to be. By a fluke, it may have attracted the first few customers in the area, and the rest just followed the crowd.

Professor Newmark calls the columnist out.

Mr. Peterson doesn't seem to realize that, far from being a surprise, his story is an example of a phenomenon that has been well studied by economists. We call it a negative network externality and it is unlikely to persist in the real world. Is there no word-of-mouth about restaurants and are there no restaurant reviewers? Can't the better restaurants find ways to convince potential customers of their quality? Would people continue to eat at a restaurant solely because they had eaten there before by chance?

And herein rests an interesting economics problem. The information cascade generating the network externality is an illustration of a potentially suboptimal pattern of imitation. It might have been present in the adoption of basic oxygen steel furnaces and the jury on diesel locomotives is still out. But there is another phenomenon in economics, particularly where commitments are not easily reversed, called "economic hysteresis," a potentially suboptimal pattern of delayed action. But modeling the flow of information about desirable and undesirable restaurants, given initial choices, is not easy, although I hope to have something more intelligent to say about it by semester's end.