WHY DO CERTAIN IDEAS AND philosophies suddenly become en vogue in society, and then just as quickly fall out of favor? Consider, for example, all of the different management fads that have come and gone in the past few decades: management by objectives, the pursuit of excellence, employee empowerment, business process engineering, core competencies, and six sigma, not to mention the Japanese model, business ethics, and now "corporate governance." Countless management gurus and cohorts of business executives enthusiastically embraced each of those trends, proclaiming it necessary for economic survival, and later dropped the trend in favor of the next emerging idea.

This following of the herd is especially curious when the trend is contrary to established evidence. Consider, for instance, the current attitude toward tobacco use. Health experts generally accept that smoking increases the risk of ailments like lung cancer, but survey research indicates that smokers and nonsmokers overestimate those risks. Harvard University professor Kip Viscusi has calculated that, if the public better appreciated the risk of lung cancer from tobacco use, smoking rates would actually increase between 6.5 and 7.5 percent. (See "The New Cigarette Paternalism," Winter 2002-2003.) Additionally, some 89 percent of adults and 97 percent of 10th grade students surveyed in California believe that breathing secondhand smoke is a heath hazard--a very doubtful proposition.

Or consider environmental scares. Revelations about the burial of toxic waste on ground that later became the site of a school and subdivision known as Love Canalin New York State led to billions of dollars in public expenditures to isolate and monitor the site. But according to many analysts, including Timur Kuran of the University of Southern California and Cass Sunstein of the University of Chicago, the fears for the residents' health were not justified by any hard scientific evidence. The Alar pesticide scare in the late 1980s also apparently lacked any scientific foundations, but public fears caused significant economic loss for Washington State apple growers who used the chemical to preserve their produce.

How can so many people suddenly sign on to a questionable idea? And then, why do they often change their opinion just as quickly? Over the last two decades, economists have tried to answer those questions using cascade theories, which attempt to explain the emergence and evolution of transient and reversible phenomena of people falling in line with the crowd.

INFORMATIONAL CASCADES

Informational cascades are the most basic sort of cascades. In them, people form their beliefs using information obtained by observing the behavior or opinions of others. UCLA economists Sushil Bikhchandani, David Hirshleifer, and Ivo Welch define an informational cascade as a situation in which "it is optimal for an individual, having observed the actions of others ahead of him, to follow the behavior of the preceding individual without regard to his own information." Although "actions speak louder than words" and economists rely more on actions to reveal individual preferences, cascade theory also applies to opinion conformity.

This behavior is rational for the simple reason that obtaining information...