The term “bubble” is now part of everyday conversation, particularly since the financial crisis of 2008. But bubbles are not just a problem in the world of banking. They can affect the choices you make every single day.
How financial bubbles work
Recent studies seem to suggest that too much liquidity is poisonous rather than beneficial for a financial market. Monetary liquidity in excess – stimulated by easy access to credit, large disposable incomes and lax lending standards – combined with expansionary monetary policies, such as when banks lower interest rates or states offer tax breaks, flush the market with capital. This extra liquidity leaves financial markets vulnerable to volatile asset price inflation, the cause of which is to be found in short-term and possibly leveraged speculation by investors.
When these combine to create a bubble, we end up with too much money chasing not enough assets. These assets – both bad and good – become elevated beyond their fundamental value to an unsustainable level. Add socio-psychological phenomena like boom-thinking, group-thinking, herding and informational cascades, and it’s just a matter of time before the bubble bursts.
Your daily bubble
Behind every financial bubble, crash and subsequent crisis lurks a political bubble. These political bubbles are powerful enough to influence financial markets, as are bubbles in the property market. But you are touched by bubbles even when you are not buying a house or dabbling in the stock market.
Filter bubbles, for example, happen when the information we receive online becomes so tailored to our existing areas of interest that we are no longer exposed to views that challenge us. If we only follow like-minded people on Twitter, we start to live in a bubble in which counter-opinions don’t feature.
The fashion industry benefits in particular from bubbles. Getting everybody, or a selective few, to trend the same way is the entire point of its existence, aside from the occasional claims about artistic diligence.
And even the art scene is ridden with bubbles. As Julian Spalding wrote in The Independent fortunes are made and lost when people buy into a particular artist and the hype around their work grows.
In science, academic papers gather attention when they are cited by others. While individual scientists may express doubt about the validity of using these citations as a measure of quality, they are still very much a part of assessment. This kind of endorsement from colleagues and institutions can be an important factor when grant proposals are submitted or when academics apply for promotion. Here, intellectual liquidity – in terms of the limited funding available for research – combines with lemming behaviour among scientists just like in a ballooning financial market.
All these bubbles push collectives of agents in the same direction, often with negative results. People in a bubble not only buy the same stock or real estate but also think the same thing, subscribe to the same news, hold the same opinions and appreciate the same art. They “like” the same posts on social media, buy the same brand names and read the same science.
Once you’ve put out your opinion on the marketplace of ideas, be it political, religious or just a personal view, it can gain popularity or prominence as it spreads. That opinion then becomes an asset that can be valued according to the number of people apparently subscribing to it in terms of likes, upvotes, clicks or similar endorsements, even if to like something online requires minimum personal investment.
Public opinion tends to shift depending on a variety of factors ranging from zeitgeist, new facts, current interests to premiums of social imprimatur. Opinion bubbles may accordingly suddenly go bust or gradually deflate – a recipe that was recently satirically documented by BuzzFeed in The 29 Stages of a Twitterstorm. Everyday personal opinions serve as intellectual liquidity, chasing assets of political or cultural ideas. As in financial markets, both can end up with exaggerated values.
Across spheres, from science to your wardrobe, bubbles share similar structures and dynamics. The term “bubble” is no longer confined to just financial movements. In the information age, it can refer to irrational, collective, aggregated behaviour, beliefs, opinions or preferences based on social proof in all parts of society.
Over in finance, informational cascades have become a major factor in the generation of bubbles, where, as economist Harold Vogel notes, “individuals choose to ignore or downplay their private information and instead jump the bandwagon by mimicking the actions of individuals acting previously”. If you think about your own actions every day, you might uncover some uncomfortable truths about the bubbles you live in.