The growth in the signing of international investment agreements (IIAs) in the period 1990 to 2009 can be characterised as an international public policy bubble. Like the rise of privatisation at the domestic level, the expansion of this international treaty regime was arguably premised on an over-estimation of the benefits of protection of foreign direct investment in light of available evidence. Yet, by the mid-2000s, the international investment treaty regime was experiencing an acknowledged legitimacy crisis and policymakers in many states began shifting course. After identifying this policy bubble, this paper aims to develop the literature on policy bubbles further by focusing on the reaction to a bubble. We firstly chart the nature of state responses to the IIA bubble by examining policymaker behavior through the prism of states both as principals (regime designers) and litigants (respondents in investment treaty arbitration). We secondly ask why some policymakers have burst (or deflated) the investment treaty bubble. In doing so, we argue that reactions are driven by either (1) an awareness of the disequilibrium or (2) a shift in the underlying equilibrium that exposes the original disequilibrium. Both of these shifts are dependent are changes in the rational choice (objective) and constructivist (perceived) calculations of costs and benefits. Here, we argue that exposure to litigation, in particular, has exposed the existence of disequilibrium while shifts in domestic ideological preferences and investment flows have changed the underlying equilibrium point.