So You Think You Can Dance? Lessons from the US Private Equity Bubble

Abstract

This article develops a sociologically informed approach to market bubbles by integrating insights from financial-economic theory with the concepts of voice and dissimulation from other cases of distorted valuation studied by sociologists (e.g., witch hunts, unpopular norms, and support for authoritarian regimes). It draws on unique data—longitudinal interviews with private equity market participants during and after that market’s mid-2000s bubble—to test key implications of two existing theories of bubbles and to move beyond both. In doing so, the article suggests a crucial revision to the behavioral finance agenda, wherein bubbles may pertain less to the cognitive errors individuals make when estimating asset values and more to the sociological and institutionally driven challenge of how to interpret complex social and competitive environments.