Bubbles as a catalyst of change

Financial bubbles are not always a good thing – but perhaps they have useful lessons for how social norms influence behaviour – rapidly and at scale

The finding of the Intergovernmental Panel on Climate Change that we need to cut global greenhouse gas emissions by 43% by 2030 means we are in a situation where behaviour needs to change quickly. This is not something that is achieved by individual action but requires collective, structural change to the way we operate – and yet this sort of transition, where we all have to act together, often seem all too slow.

But if we look at the stock market, and in particular stock market bubbles, we see that collective behaviour can in fact change at a startling pace. As the film Dumb Money shows, this sort of stock market activity is not the preserve of hedge fund managers but can in fact be inspired by grass roots campaigns. In the film, the character Keith Gill uses the power of social media to inspire the collective action among amateur traders to drive up the price of GameStop stock, causing huge losses for the powerful hedge funds that had bet against the company by short selling its shares.

Stock market bubbles are not often linked to the societal challenges we face (in fact they can be considered to be part of the problem), but they are a form of collective action that deserves closer scrutiny given their speed, scope and scale.  Taking a social science lens to this, and in particular drawing heavily on a paper from Betsy Paluk, we can use bubbles to think more carefully about the way collective behaviour works.

It has long been understood that social mechanisms are key to behaviour – indeed, there are few behaviour change projects which do not at least consider the role of ‘social norms’ as a means of creating new outcomes. In the most straightforward version of this, a social-norm intervention tells people what others are doing or what others approve of, to encourage them to do the same. It is often assumed that it is mimicry – but there are other more powerful explanations relating to the third-person-effect, where we are using this social information to tell us about other people’s beliefs and values – which then informs our behaviour in meaningful ways.

And we argue this helps us to better understand not only what is going on in stock market bubbles, but as a means to inform strategies for tackling the wide range of other collective challenges we face.

What are stock market bubbles?

To define terms, we can think of stock market bubbles as the rapid escalation of prices beyond what is sustainable, supported by a belief in continued price increases while turning a blind eye to underlying fundamentals. These bubbles are followed by a sudden crash where prices plummet to levels more reflective of the asset's intrinsic value.

A case in point is that not too long ago, well-known personalities such as Kim Kardashian and Matt Damon were endorsing cryptocurrencies. In addition, Non-Fungible Tokens (NFTs), which are a derivative of cryptocurrency that provide blockchain-based ownership certificates for digital items, reached record highs with cartoon apes fetching millions of dollars. The value of Bitcoin has significantly decreased since record highs of 2021 and the market for NFTs has collapsed. It appears that cryptocurrency was a bubble that has burst.

Of course bubbles are nothing new, with one early example being Tulip Mania in the 17th century, where the price of tulip bulbs reached extremely high levels before crashing. Initially, tulips became a status symbol, and their prices soared due to speculative trading. However, the market crashed as people realized the prices were not sustainable, leading to a rapid change in belief about the value of tulips.

Whilst the term bubble is typically used in the context of stock market speculation, the very same principles can be at play in our beliefs on other issues. For example, a now thoroughly debunked study published in 1998 falsely linked the MMR vaccine (measles, mumps, and rubella) to autism, leading to what we could call a bubble in anti-vaccine sentiment. Despite extensive research disproving this link and affirming the safety of vaccines, the belief persisted for years.

In another example from the 1970s, some media outlets and a minority of scientists speculated about the imminent threat of global cooling, predicting a potential new ice age. This belief gained some public traction despite being contested by contemporary climate science research that already suggested global warming.

What are the mechanisms of bubbles?

In their book "Bubbles and Crashes: The Boom and Bust of Technological Innovation," Brent Goldfarb and David A. Kirsch suggest that technological innovation often leads to speculation. There seems to be new opportunities but with limited information about their potential. Investors start to speculate, driving prices up based on expectations rather than fundamentals. Goldfarb and Kirsch point to the way that a strong, optimistic story about the potential of a new technology can lead to a bandwagon effect, where investors buy, not because of intrinsic value but because of the fear of missing out on potential gains.

Eventually investors recognize that asset prices are not supported by fundamental values. And just as compelling narratives can drive the formation of a bubble, a shift in the narrative can contribute to its bursting. If the story changes—due to failed predictions, better understanding of the technology, or simply a loss of enthusiasm—investors may lose confidence and start selling off their assets.

In many ways we could see that this sort of speculation is based on our beliefs about what other people will do, the third-person-effect.  If we believe other people have been influenced by information about an investment and are buying or at least considering buying stock, then it seems pretty sensible for us to do that too.  And the same principle works in converse – if we think people are no longer confident in an investment and are selling, then this directly influences our behaviour, selling stock.

This is one of the reasons why so much emphasis is placed on ‘consumer confidence’ – it is not only to do with out faith in the underlying ‘fundamentals’ but what we anticipate other people’s confidence looks like. We also saw this in relation to voting behaviour where research has suggested that, regardless of political identification, people are much less satisfied with democracy the more they believed misinformation influenced others relative to themselves. 

Social norms

So we can see that social information sits behind our behaviour, and the speed and potency of stock market bubbles suggest this can be a powerful means of behaviour change. But much of the time, as Paluk points out, this consists of simple messages containing normative information (e.g. posting signs at hospital entrances showing the percentage of visitors who prefer a smoke-free environment) which leads to people using this, individual by individual, to mimic what most others seem to be doing.

Paluk argues, however, that understanding social behaviour extends beyond mere imitation. She cites the example that presenting evidence that other hotel guests reuse their towels doesn't directly lead to increased towel reuse. Rather, the decision to reuse towels is influenced by the perceived identities of the other guests and what their actions suggest about the acceptable norms of behaviour in that setting (see here and here).

Hence the notion of social proof carries a great deal of meaning concerning norms—and these norms are not static mental statistics but are instead hypotheses repeatedly tested against observations. And here we can see the third-person-effect in action – we gather evidence to establish the beliefs of other people; so residents can see whether their roommate hangs up the towel after showering, notice if used towels are being taken of other rooms on the housekeeping cart, talk to a friend or colleague staying at the hotel about the reuse of towels. This sort of ‘social information’ means we can update our perception of the behaviours, beliefs and opinions that are held by other people within our social groups. So rather than simple mimicry, this is a more active process of assessing what other people are thinking, assessing their attitudes and behaviours in an active, dynamic way.

Paluk extends her analysis to the idea of a reference group, the group whose opinions and behaviours matter most, and as such they serve as the source of social proof. This is critical as there are many occasions where social proof simply does change someone’s judgment. One strategy to make change happen therefore is to target an intervention to individuals who are the social referents who will shape the group norm. The principle here is that if an intervention can change the attitudes and behaviours of these key individuals, it will then have a knock-on effect for the other group members who are seeking to understand their beliefs, attitudes and behaviours.

Paluck and colleagues used this approach to reduce conflict between school students. They targeted students who were given the most attention in each school’s social network and then worked with these individuals to reduce their conflict behaviours and to publicize anti-conflict opinions.

Given the social referents’ behaviours and opinions are overweighted in the way the wider student population access information about social norms, this approach was successful in changing other students’ ideas about norms of conflict at the school, resulting in a lower incidence of conflict (as noted in the school administrative records).

Another related finding from organizational contexts is that people look to the bottom of the status hierarchy, rather than the top, for information about social norms. This suggests that it might be more effective for an intervention designed to change organizational culture to start at the bottom, rather than the top, of the organization. The third-person-effect therefore operates in a targeted way, with some people being more influential than others -  understanding who these reference groups are in different contexts is therefore an important component of behaviour change.

Weakening social norms

And with further reference to Paluk, another strategy is to weaken, rather than strengthen, the social norm. The reason is that established norms can be an obstacle to social change as they keep opinions and behaviours in place even if people no longer privately support them. This ‘pluralistic ignorance’ can be addressed through social reality-testing, revealing the weakness of the norm to facilitate social change. Paluk cites a study on how this was used to reduce alcohol consumption by college students. There were strong social norms promoting excessive drinking; to tackle this, group discussions were used to give students the opportunity to talk about these norms, to express their views about the behaviour, and, importantly to hear the views of their peers. This created an opportunity for updating students’ understanding of what other people thought about this issue, something that can otherwise be hard to identify. And sure enough, it revealed to students that although there was a strong norm, it lacked private support and there was a subsequent reduction in excessive drinking.

Again we can see the way that the dynamic way in which we operate, scanning the environment for what other people are doing and thinking, then being used to inform and shape our own behaviour.

We might ask why this is so powerful – does it mean we are sheep-like, simply looking to others in order to determine what we ourselves do, a form of conformity?  That is of course one explanation, but another is that much of the time our behaviour is one which revolves around what others are doing. Indeed, at a wider societal level, many of the challenges we face today are collective rather than individual in nature. People as diverse as Naomi Klein, Paul Polman, Greta Thunberg and Ban Ki-moon have all called for international collective action and radical systemic change to make much needed change happen.

As such, the import of what we ourselves do depends on others – our willingness to engage in activities to reduce our carbon footprint only really make sense if we can see that they are also being undertaken by others (as we each recognise that our own contribution in itself is effectively meaningless). Similarly with the example of excessive drinking – we all want to relate to those around us, so if we mistakenly assume they all want to consume large volumes of alcohol then we may feel we also need to, in order to have friends and relationships.

In conclusion

We can see the way that stock market bubbles can be understood by the third-person effect: if we think that others value the stock and assume it will go up, then it makes sense for us to invest.  And of course the opposite applies in the case of a crash. The film Dumb Money showed the way in which social media can have a significant role in holding up an understanding of collective behaviour, as we can see more readily what other people are thinking and what they are doing (albeit this environment can be ‘polluted’ via algorithms and ‘bad actors’ seeking to spread an alternative narrative).

It is perhaps useful to note, as Neil Levy sets out, the way in which we all live in a ‘cumulative culture’ in which our collective, shared knowledge has a type of a ‘ratchet effect’.  This means we are not all having to learn anew each time, instead our collective knowledge becomes a shared platform on which others can build.  For example, we do not need to learn about vaccines anew each time, we have a collective understanding of what they are and how they work.  We cannot hope to have access to ‘first order representations’.  The vast majority of the population accept that vaccines can prevent illness but have little understanding of how they actually do this. 

We can see therefore how much of our behaviour is not necessarily about what we believe but instead concerns what we assume about other peoples beliefs.  If this is the case, then the potential to make change happen can potentially be fast – with financial bubbles offering a good case in point.

Given some of the challenges we face are not only huge in scale but need change to happen quickly, thinking through the way in which we can harness ‘bubbles’ as a catalyst of rapid change may well be helpful.