This document summarizes a presentation on analyzing asset bubbles from a narrative perspective. It makes three key points: 1) Narratives play a central role in fueling asset bubbles by enabling phenomena like herd behavior and euphoria. Different levels of narratives can form, from global to asset-specific. 2) Bubbles can be viewed as developing through three stages - an initial competing narratives stage, a collective bubble narrative formation stage, and a stage where the narrative becomes institutionalized. 3) Examining bubbles through a narrative lens helps identify and understand how and why bubbles exist, grow, and are difficult to pop, and can help synthesize different research on bubbles. Factors that amplify

1. Presented at the Sixth International Symposium on Process
Organization Studies
19-21 June 2014, Rhodes, Greece
Cracking the enigma of asset bubbles:
A narrative perspective of financial
speculation
Preston Teeter & Jörgen Sandberg

2.  “When the market price of an asset exceeds its
price determined by fundamental factors by a
significant amount for a prolonged period”
(Evanoffetal.,2012,p.1)
 Bubble burstings can be disastrous
Asset bubbles
Source: RealtyTrac
U.S. Foreclosure Activity (‘05-’06)

3. “one of the most paradoxical behaviors of real financial
markets”
(Hüsler, Sornette,andHommes, 2013,p.304)
“[have] forced researchers and policymakers to reconsider
their understanding of both the economics of asset price
bubbles and alternative policy options to address them”
(Evanoffet al.,2012,p.1)
“I can calculate the motions of the heavenly bodies, but not
the madness of the people.”
(Isaac Newton,1720,afterlosing £20,000in theSouthSeaBubble)

4. Mainstream economics
• Strict market fundamentalism
• Intrinsic/extrinsic bubbles
• Rational speculators
• Frictions
Irrational behavior?
Theory
Behavioral studies
• Group think/herd behavior
• Escalation of commitment
• Overconfidence/hubris
• Theory of mind (ToM)
Social context?
Sociological studies
• Institutional failure
• Regulatory failure
• Normal accident
• “Manic culture”
Nascent state

5.  “We still do not have a good definition of an asset
bubble; and we still do not know how to identify
them, what causes them to grow or burst, and what
their welfare implications are.” (Evanoff et al., 2012, p.4)
 Why do large-scale bubbles still exist?
 Why do certain assets develop bubbles?
 Why can’t bubbles be popped?
 Can we synthesize (some of) our research?
Unanswered questions

6.  “Cohesive story or account of events, experiences,
or phenomena, whether true or fictitious”
 Lifeblood of asset bubbles
• “the history of speculative bubbles begins roughly
with the advent of newspapers” (Shiller, 2005,p.85)
• Enable phenomena such as herd
behavior, ToM, and euphoria
• Media bias influences bubbles
(Bhattacharya et al., 2009; Hartz & Steger, 2010)
Narratives

7. 1920s: The end of “The war to end all wars”
Levels of narratives
Global
Regional
National
Broader Economy
Specific Asset (Class)
1990s: “Asian economic miracle”
1980s: “Japan as Number One”
1990s: “New economy”
2000s: “Homes are investments
that never lose value”

8.  Sensitizes one to the role and influence of narratives
 Theoretical underpinnings
1. Narrative paradigm
• Response to information overload and time pressures
• Ex. narratives at Federal Reserve (Abolafia,2010b)
2. Social constructionism
• Economic activities enacted in social, institutional contexts
• Ex. 1970s silver bubble (Abolafia& Kilduff,1988)
3. Process view
• Shifts over time in perceptions, procedures, etc.
• Ex. financialization of economy (Davis, 2010)
Narrative perspective

9. Narrative perspective
Bubble narrative Collective
bubble narrative
Institutionalized
bubble narrative

10. Stage 1
• A state of competing narratives
• Bubble narrative leads one to expect abnormal returns
• Ex. “LA home prices will rise b/c of reasons a, b, & c.”
Good for
rental returns
Risky
investment

11. Stage 2
• One narrative becomes widely shared
• Collective bubble narrative forms in one or more groups
• Ex. Property developers bid up prices in LA
Good for
rental returns
Risky
investment

12. Stage 3
• A narrative becomes institutionalized
• Institutionalized bubble narrative becomes context
• Ex. “Home prices always/should/must go up.”
What cities
are the best
investments?
How much
will prices go
up this year?
Home prices
are falling!
Oh no!

13. Bubble amplifiers: factors that affect the scale, scope, and
speed of a bubble and/or its narrative
 Low interest rates/credit availability (Issing, 2009)
 (Financial) innovation (Morgan, 2010)
 Deregulation (Jain, 2009)
 Fraud (Akerlof andShiller,2009)
 Agency issues (Friedman, 2011)
 Cultural shifts (Hirsch andMorris,2010)
What about other factors?

14. Bubble Levels of
narrative
Central
narrative
Examples of
institutionalization
Amplifiers
Enron
stock
Per share
1998: $20
2000: $90
2001: $1
Company
stock
Broader
economy
America's most
innovative company
New economy
Named by Fortune
for 6 consec. years
Tax exemptions to
tech firms; large
increase in day
traders
•Fraud
•Agency
•Conflict of
interest
•Dereg.
•Innovation
•Interest
rates

15.  Identifying bubbles and their various stages
 Understanding why bubbles exist
 Understanding how bubbles grow
 Understanding why certain assets develop bubbles
 Understanding why bubbles are difficult to pop
 Helps to synthesize (some) research
How does this help?

16. • Fundamentals
• Frictions
• Hubris (throughout)
• Fundamentals
• In/extrinsic bubbles
• Rational speculators
• Group think/ToM
• Esc. of commitment
• Inst./reg. failure
• Normal accident
• “Manic culture”
Bubble amplifiers

17. Questions?