When an inflated balloon is placed in cold water, it shrinks. This happens because the air inside the balloon occupies a smaller volume when the temperature is decreased, thus causing the walls of the balloon to collapse.
Air is a gas and has molecules that are free to move around inside a closed container with a certain amount of energy. The temperature of air dictates the kinetic energy of the molecules. At higher temperatures, the molecules have a high kinetic energy and therefore move with a greater velocity.
When a balloon is inflated at room temperature, the molecules of air that are forced into the balloon begin to collide with the walls of the balloon, thus causing the walls to expand and the balloon to inflate. As long as the molecules have a high kinetic energy as they collide with the walls of the balloon, the pressure inside the balloon remains high, and the balloon remains inflated.
When the inflated balloon is placed in cold water, the cold water lowers the overall temperature of the air inside the balloon. The decrease in temperature causes the air molecules to move more slowly, with less energy. Since the molecules have lower energies, their collisions with the walls of the balloon are insufficient to keep the balloon inflated.