Social media and the self-fulfilling prophecy

Economy May 14, 2014 00:00

By Athakrit Thepmongkol


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In Thailand, social media has demonstrated its impact on the community during our on-going political turmoil. An important example was an attack against the Government Savings Bank (GSB).

When GSB was accused of lending Bt5,000 million to the Bank of Agriculture and Agricultural Co-operatives (BAAC) for the government to use in its rice-pledging scheme, my Line groups and Facebook feed were flooded with messages inciting me and others to withdraw money from GSB’s deposit account. How could people, mostly highly educated, take such an action so lightly? Aren’t they scared of a deadly bank run?

A bank run is defined as a situation where a large number of depositors withdraw their money simultaneously from the bank because they believe it will fail. The more people believe, the greater the risk the bank may default and hence the more the panic multiplies. Finally, the belief comes true.

Specifically, the bank acts as an intermediary to facilitate financial transactions from savers who are subject to unforeseen liquidity needs - to investors who need the funds for their long-term projects.

Fundamentally, the bank’s deposit contract is created to solve this maturity mismatch problem. By combining savings from a group of depositors who have different liquidity needs, the bank can lend the long-term loan to investors with only small liquidity reserves in hand. Yet, a deposit debt contract allows every depositor a legal right to withdraw their money at any time. If that happens, the bank will run out of liquidity and default. Simply put, insolvency is at the heart of the deposit debt contract.

This bank run is driven purely by the belief that other bank customers have similar beliefs. Such coordination of belief is where social media plays a crucial role. Since everyone has his own channel through which to express beliefs, social media helps simplify and accelerate the coordination process. When hate speech and propaganda stimulate panic, it becomes much easier for the good equilibrium – where everything seems in balance - to switch to bad equilibrium in the bank - leaving Thai people to bear the cost.

Fortunately, this did not happen to GSB. According to GSB’s balance sheet of 2012, it had a Bt1.8-trillion savings account and Bt134-billion in retained earnings as a liquidity reserve. If all savings had been withdrawn at once, the liquidity reserve would have been insufficient and GSB would have defaulted and gone bankrupt. As a result, with GBS’s Bt87-billion interbank liability having defaulted, other banks would have been badly affected, leading to further panic. All banks might have experienced a run and Thailand’s entire banking system would have eventually collapsed. Such a catastrophe comparable to the 1997-Tom-Yum-Kung crisis could have resulted from just an ill-considered post on social media.

A bank run is an example of |the more general concept called a “self-fulfilling prophecy”. This says that things happen according to |what you anticipate. In other words, |a belief can fulfill itself. When people believe that a piece of paper has |its own value, it becomes money. When people believe that the price |of houses will increase, they create |the speculative demand in a housing market and bubbles emerge. Through the coordination of scepticism and distrust, the bad event would prevail: money would lose its value and the bubble would burst. Notably, social media can become an influential tool to reflect what people think.

However, the coin always has two sides. Social media can help coordinate positive beliefs as well. Therefore, what social media does is to make the switching between positive and negative beliefs easier, causing more volatility. Ultimately, social awareness is a necessary requirement for the online world. A single irresponsible Facebook message might finally result in a complete disaster far worse one could possibly contemplate.

Athakrit Thepmongkol, Ph.D. Lecturer,

Graduate School of Development Economics,

National Institute of Development Administration (NIDA)

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