By combining an economic perspective on financial instability with a sociological analysis of collective behavior, this paper lays out a conceptual foundation that is suggestive of a fuller understanding of speculative manias and financial panics in highly liquid financial assets. The paper argues that a collective enthusiasm develops in an environment of “optimistic uncertainty” created by the gradual diffusion of a revolutionary innovation of the type examined by Rosenberg. An adaptation of Simmel’s theory of fashion in the emerging norm framework of Turner and Killian explains the swell of speculative excitement. Once started, the enthusiasm continues in a Schumpeterian manner until the objective potential of the innovation becomes apparent and estimable. If the contemporaneous degree of optimism proves unfounded and prices too high to sustain, a reversal of fortune ushers in distress that may inspire panic. A panic, contrary to implications of extant economic theory, does not necessarily follow a period of extreme speculative enthusiasm. This paper suggests instead, in light of Lang and Lang’s analysis of collective dynamics, that certain objective market conditions create a panic in a distressed environment.
