When and Where Can Institutionalization Occur? The Case of Price Bubbles in Financial Markets

This study analyzes the oft-neglected linkage between the micro-foundations of institutionalization and their macro-institutional outcomes. We use price bubbles in financial markets to contextualize our analysis, and employ a well-established experimental methodology, allowing us to (1) analyze institutionalization processes at the most granular level, (2) examine institutions as they form, and (3) control more precisely for alternative, non-institutional explanations. We find evidence that institutionalization processes can quickly occur, even in seemingly efficient financial markets. Additionally, we specify, test, and reject alternative individual-level explanations such as skill deficiency or overconfidence. Finally, we address more precisely the mechanisms presumed to be driving institutionalization by demonstrating how institutionalization processes in markets respond to varying levels of ambiguity. We conclude with a discussion of our sociological explanation for price bubble outcomes, and its relevance for neo-institutional theory.