Lines

You can learn a lot from the length of a line. In spring of 2002, my game theory class started at 2:40 p.m. Once, when I arrived exactly at 2:40, I noticed that many students were standing outside of the classroom. I assumed that the previous class had not yet left. After waiting for about three minutes, I looked inside the classroom and saw only my own game theory students. The previous class had left long ago. A student told me that she was talking outside of the classroom with a friend, and other people just assumed that the classroom was still occupied and waited outside.

Even though most everyone who waited outside the class was wrong, we all acted rationally. When we came to the room and saw people waiting, we gained information. It was reasonable to assume that they were waiting for a reason, the most likely reason being that the classroom was still occupied.

Lines can also provide you with useful information about restaurants. If you are new to a city, you might want to go only to restaurants with long waiting lists. Waiting lists signal that other people find the restaurant desirable. If you tend to like restaurants that other people like, then you might want to eat only at a restaurant that would take a while to seat you. Of course, an unpopular restaurant might manipulate this situation and deliberately close off much of their space to artificially set demand above supply.

Why is it so difficult to get tickets to popular Broadway shows like The Producers?^[10] Normally, businesses increase prices when demand exceeds supply. Generally, the only cost of raising prices is that it results in fewer customers buying your product. If your product would sell out even if you set a higher price, however, there would seem to be no disadvantage to increasing prices. What if ticket fans use lines to judge a show’s quality? Perhaps by having sellout crowds today, The Producers generates good press, ensuring it will have patrons far into the future.

Consequently, there is a shortage of tickets for popular Broadway plays, because patrons don’t trust theater critics. If we could rely on critics to identify quality plays, we wouldn’t need to rely on the information we gain from lines.

Lines can cause bank panics. Currently, most bank deposits in the United States are insured by the federal government, so even if your bank runs out of money, depositors can still get their funds back. Before the Great Depression, however, there was no deposit insurance. If your bank went under, your savings were lost.

Imagine that your bank has the funds to pay off only 80 percent of its depositors. If everyone finds out about this bank’s insolvency, everyone will try to get their funds before the bank goes bust. Of course, if everyone attempts to get their money back, 20 percent of the depositors will be disappointed. Consequently, all the depositors will hurry to the bank to avoid being one of the left-behind 20 percent.

Let’s say that you believe that your bank is doing well, but you see a very large line in front of the bank. What should you think? The long line might indicate that the bank is in peril, and thus you should join the line before the bank runs out of funds. Of course, once you get in line, the line’s length grows and further demonstrates to other depositors that they should join the line.

Let’s complicate this story and assume that the bank is fine as long as everyone doesn’t immediately demand their money back. Assume that the bank has cash on hand only to cover 20 percent of deposits. The rest of its funds (like in the movie It’s a Wonderful Life) are tied up in home mortgages. If the depositors are all patient, the bank will be able to cover all deposits. If, however, depositors all want the funds immediately, the bank will have to call in their loans at a loss and consequently won’t be able to repay all depositors. If a large line starts to form, you should get worried and join the line. You are joining the line, because you know if many other people want to withdraw their funds, then so should you. If there were no line, you would be happy keeping your funds in the bank. It’s only when many other people want to withdraw funds that you do too. Interestingly, if a line formed, and someone asked you why you were withdrawing your funds, the reason would be because many others were doing the same. The line therefore exists because the line exists: It’s self-justifying.

Similar stampede effects can cause foreign currency crises. Imagine that there was a financially healthy third-world country that had attracted a lot of foreign capital. For whatever reason, however, many foreign investors decided to withdraw their capital. If most foreign investors took back their funds, the capital flight would devastate the economy and lower the value of the foreign investments. Consequently, if you suspected that other investors would withdraw their funds, you would want to get your money back as soon as possible. This healthy economy could thus be devastated merely by a belief that foreigners wanted to withdraw their funds because this belief would be self-justifying. If everyone believes it, everyone will want to get their money quickly, so the belief becomes valid.

^[10]Slate (September 6, 2001).