In a wonderful book “The Art of Contrarian Trading”, the author, Carl Futia, writes on information cascades.

“The information transmitted in a cascade is of two types. First are the specific beliefs and facts conveyed by the founding members of the crowd to potential new members. This is the stuff of the crowd's investment theme. It is a logically coherent story but one intended to trigger an emotional response rather than scientific agreement. Typically, this first sort of information is transmitted through the electronic and print media, although person-to-person contact often plays a role as well. This transmission mechanism is open to public view. The transparent nature of the media gives us the opportunity to watch the information cascade develop simply by keeping track of the number and intensity of the messages.

However, information that merely elaborates on an investment theme would not by itself be persuasive were it not accompanied by a second, more dramatic piece of persuasion: a big change in the market price in the direction predicted by the theme that has enriched a small but visible group of investors (or made them a lot poorer!). Indeed, it is the prospect of getting rich or the fear of getting poor that creates the emotional power the investment theme needs to attract a crowd of investors.

To illustrate this last point, let's recall the dot-com bubble of 1994-2000. Does anyone imagine that investment themes like the new economy and the transforming power of the Internet would have been taken seriously if the stocks of America Online (AOL), Yahoo!, and other dot-corns hadn't first staged impressive advances, if a steady stream of initial public offerings hadn't made their lucky buyers rich? No, I don't think so, either. But once investors saw how much money they might have made had they picked up these themes early enough, they were hooked. The logic of the investment theme was simply icing on the cake, a convenient justification for joining the crowd.

We see then that economic and business information and forecasts, the dreams and fears of investors, and the movements of prices in the financial markets all have important roles to play in the creation of an investment crowd. They all are part of a potent brew of persuasion that manifests itself in an information cascade. But a dramatic change in the price of some asset always comes first. This is the prime mover and seed of the information cascade that will ultimately create an investment crowd. Only after the fact is the price change ever explained by appeal to economic and business developments. Even then, these explanations are only dry, unemotional facts. By themselves they will not persuade an individual who has no time or skill for scientific analysis. To do their work, these explanations are leavened with emotional appeals to greed, to fear, and to the natural human desire to get ahead of one's fellows. Then and only then will the information cascade gather momentum and create a new investment crowd.”