For a sociology of bank runs

April 11, 2009

As part of my research on the use of models on Wall Street, I have lately been asking myself about traditional bank runs and their relationship to the crises of Bear Stearns, Lehman Brothers and AIG. Following Robert Merton’s work on self-fulfilling prophecies, bank runs have been a stronghold of sociological theorizing (See here for an excellent summary in Wikipedia).

According to Merton, because bank solvency is a social phenomenon, what humans believe about a bank can determine its fate. “Predictions of the return of Halley’s comet do not influence its orbit. But the rumored insolvency of Millingville’s bank did affect the actual outcome. The prophecy of collapse led to its own fulfillment” (Social Theory and Social Structure, p. 477).

What is so interesting about self fulfilling prophecies is that economic “fundamentals” are not the only determinants of behavior and could indeed be irrelevant. It suggests that economists may not have the intellectual monopoly over the public policy discussion on systemic risk. And it is very relevant to the contemporary discussion on performativity.

However, the theory still raises many questions. How is it that a depositor comes to believe his or her money is not safe? What about a group of depositors?

If, like myself, you are interested in these questions, here is a terrific video about how the Federal Deposit Insurance Corporation prevents bank runs:

9 Responses to “For a sociology of bank runs”

  1. I wonder if there is a connection to be made here between self-fulfilling prophecies in specific, and larger notions of social construction. Your Halley’s Comet example reminded me of Ian Hacking’s work on “dynamic nominalism” and “the looping effects of human kinds”. I don’t have anything in particular in mind right now, but it seems like a larger inquiry into the social construction of “economic fundamentals” might be in order.

  2. danielbeunza Says:

    Good point. The thing about “social construction” is that, as Latour writes, there is no consensus among sociologists about how it happens. Callon, in his chapter on the book “Do Economists Make Markets” looks at the difference between performativity and self fulfilling prophecies. To him, performativity is a particular case of the broader set of instances when ideas shape phenomena. He argues the term should be reserved for the effect that economic theories have on the economy. The issue, I think, is whether modern bank runs a la Bear are cases of performativity or whether sociologists need a new concept for this.

  3. […] This post was also inspired in part by the recent post on SocFinance about performativity, self-fulfilling prophecies and the idea of “economic […]

  4. Will Davies Says:

    I also wonder whether this raises questions about the supposed divide between ‘orthodox’ economics and behavioural economics. We can see that herd-like behaviour can destroy financial systems and bring down banks. But then again, financial systems and banks also depend on some form of herd-like behaviour.

    So perhaps some forms of herd-like behaviour are more rational than others. It is arguably more rational to join the herd in a well-regulated system than in a pyramid scheme. The former considers and protects against possible disjunctures between individual and collective rationality, whereas a pyramid scheme pits the individually-rational and the collectively-rational at logger-heads with one another. However, one might argue that many financial systems fall somewhere between the two.

    I’m sure there are people who have thought far more carefully and intelligently about this than me. But I wonder if the bipolar, ‘rational-incentive v irrational-instinct’ (that is, after all, only a product of the reification of the former – just as ‘market failure’ results from the a reification of the market) is really as tenable as economists might wish. This feels like a Keynesian issue…

  5. Peter Klein Says:

    Will, there are two different issues here. The most “orthodox” economic models of bank runs are not models of herd behavior, but simply comparisons of Nash equilibria (e.g., Diamond and Dybvig, 1983). If everyone believes the bank is solvent, then no one will run on the bank, and the bank will in fact be solvent (the “good” Nash equilibrium). If everyone believes the bank is about to fail, then everyone will withdraw their deposits, and the bank will in fact fail (the “bad” Nash equilibrium). I’d characterize these models as descriptions of mutually consistent expectations, not models of runs per se.

    There is also a literature by (orthodox) economists on “rational herding,” in which imperfectly informed agents take other agents’ behavior as signals, updating their beliefs accordingly, leading to potential information cascades (man, who is putting up all this good stuff on wikipedia?). None of this literature is “behavioral” in the sense I think you mean.

  6. zsuzsannavargha Says:

    Daniel, your question about how depositors come to believe their money is not safe is crucial. The video is fascinating. The lengths to which the FDIC team goes to keep rumors from starting is amazing (my favorite is the pseudonym “CB associates” used to check in to the local hotel), and it raises questions about the possibility of doing anything vaguely similar in trading-related investment bank runs like Bear Stearns.

    I found this distinction between self-fulfilling prophecy and performativity helpful, from Callon’s chapter noted above (online:

    “Whereas the notion of a self-fulfilling prophecy explains success or failure in terms of
    beliefs only, that of performativity goes beyond human minds and deploys all the
    materialities comprising the socio-technical agencements that constitute the world in
    which these agents are plunged: performativity leaves open the possibility of events
    that might refute, or even happen independently of, what humans believe or think.”

    There is obviously a point here about economics models of bank runs as well, since they solely rely on actors’ beliefs of what is true (rational herding, Nash equilibria). This is not to say that beliefs don’t matter, of course. I agree with Daniel that economic “fundamentals” don’t bring down a bank by themselves, confidence is an enormous issue (this is what William Cohan was trying to get across with Jon Stewart, by the way).

    Imagine the statement “X bank is in trouble.” How do we go from this utterance (by whom? spreads how?) to people standing in line at their bank (or to other banks deciding not to accept certain collateral anymore)? What is the world that such a statement builds, with social and technical agents, in which the statement itself will be true? And how is it built, and is it a stable one–i.e. does the bank always fail?

  7. jck Says:

    Here is a good one:

    “In the mid-1980s, a long line in front of a Hong Kong pastry shop adjacent to a bank triggered a bank run. Depositors assumed that the line was headed into the bank; word spread rapidly; soon, the bank was mobbed.”
    (in “The Panic of 1907”, by Bruner and Carr, page 155 )

  8. Timur Ergen Says:

    zsuzsannavarghas questions point into an exciting direction: the question in how far these self-accelerating “tit-for-tat processes” in the creation of somehow ordered dynamics (let it be SFPs, Cascades or played Equilibria) have certain similarities in the structure of their initial “ground” emergence. I think one should look for the works in the sociology of innovation, especially in those accounts which discuss the creation of space or the smoothing of the way for the creation of expectation or other cognitive structures – meaning an early stage of (perhaps spacial) facticity acting as a prerequisit and ground for opportunist dynamics. (cf. Van Lente and Rip on the Emergence of Membrane Tehnology)
    Blaming merely contingency, tits-for-tats, tresholds and forms of cognitive contagion could be a second-order phenomenon in a sociological account of grounds or spaces for coordinating social dynamics.
    I am not sure if one should go back to narratives or constellational moldings and performative elements, but I think it is the main research field, solving the contingency in the emergence of these processes instead of the focus on the contingency in their flow, direction or degree of acceleration. From this perspective accounts of performativity and constellational structurings provide the basis for the research in SFPs patterns and causal effects.

  9. salman Says:

    hey people some1 tells me how banking sector relates with the 3 perspective of sociology?
    1. functional
    2. conflict
    3. interactionist

    plz do send da ans on my id

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: