Reputation Cascades

The theory of reputation cascades explains why rational individuals who care about their own[Page 627] reputation might adopt the opinion of others, sometimes contrary to their own existing belief, and why this process—the cascade—leads to the formation of general opinions that are sometimes very stable over time. Reputation cascades apply to what individuals say about firms and can therefore be a strong driver of corporate reputation.

The theory rests on three fundamental assumptions. The first is that most people are rationally ignorant when it comes to firms: Because the costs of getting informed about these firms are high and the benefits relatively low, people often decide to remain ignorant and to rely on the opinion of others about these firms. It is thus the opinions of ...