Understanding Society
Economic Bubbles
EDITORIAL INTRODUCTION
What connects a financial bubble with a classroom full of silent students? Through Rutger Bregman’s Humankind: A Hopeful History, Doug pairs John Maynard Keynes’s beauty-contest analogy for speculative markets with psychologist Dan Ariely’s nonsense lecture on ‘dialectic enigmatic theory.’ No student challenged the gibberish. Both episodes illustrate pluralistic ignorance: people follow what they imagine everyone else believes.
A Note on the Original Text
Doug’s writings are presented as originally written. Spelling, punctuation, and grammatical irregularities have been retained to preserve his words and the integrity of the original record.
ORIGINAL WRITING
The content in this post is based on the book Humankind: A Hopeful History by Rutger Bregman.
“Take economic bubbles. John Maynard Keynes concluded that there was a striking parallel between financial markets and beauty pageants. Imagine you’re presented with a hundred contestants, but, rather than picking your own favorite you have to indicate which one others will prefer. In this kind of situation, our inclination is to guess what other people will think. Likewise if everyone thinks everybody else thinks that the value of a share will go up, then the share value goes up. This can go on for a long time, but eventually the bubble bursts. That happened, for example, when tulip mania hit Holland in January 1637, and a single tulip bulb briefly sold for more than ten times the annual wage of a skilled craftsman, only to become worthless a few days later.
Bubbles of this kind are not isolated to the financial world. They’re everywhere. Dan Ariely, a psychologist at Duke University, once gave a brilliant demonstration during a college lecture. To explain his field of behavioral economics, he provided the class with what sounded like an extremely technical definition. Unbeknown to the students, however, all the terms were cobbled together in a series of random words and sentences to produce gibberish about ‘dialectic enigmatic theory’ and ‘neodeconstructive rationalism.’
Ariely’s students —at one of the world’s top universities— listened with rapt attention to this linguistic mash-up. Minutes ticked by. No one laughed. No one raised their hand. No one gave any sign that that did not understand.
‘And this brings us to the big question…’Ariely finally concluded. ‘Why has no one asked me what the #$? @!I’m talking about?
In psychology circles, what happened in that classroom is known as pluralistic ignorance—and, no, this isn’t a term generated by a machine. Individually, Ariely’s students found his narrative impossible to follow, but because they saw their classmates listening attentively, they assumed the problem was themselves. (This phenomenon is no doubt familiar to readers who have attended conferences on topics like ‘disruptive co-creation in the network society’.)