Decision making in ignorance and consequent market outcomes: Equilibrium analysis

Abstract

In recent years a series of important work has stressed the importance of iterative planning with market experimentation and learning in markets characterised by uncertain and dynamic environments. The possibility of herding, anti-herding and erroneous social learning, collectively called informational cascades, can add further instability to unstable markets in which actors suffer from significant knowledge gaps, or from plain ignorance. The main innovation of this paper is to make rational decision-maker aware of the adverse consequences of informational, or information, cascades in markets characterised by ignorance due to their uncertain and dynamic environments. This paper offers for the first time, to the best of our understanding, a simple modelling of a market with uncertain and dynamic environments and explains the existence of an equilibrium that is immune from the vagaries of whims, fads and informational cascades. The implication cannot be overstressed: issues of stock-out and markdown losses, market crashes and failures can be pushed to the background if the smart decision-makers can home in on this cascade-free equilibrium. In future work, it is imperative to design a mechanism that can act as perpetual succour to the cascade-free, or what we call "blessed", equilibrium in contradistinction to the famed "cursed equilibrium".