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: