How does this happen? Water is a great conductor of heat so the thin plastic of the balloon allows the heat to travel through quickly and heat the water. As the water closest to the flame rises up, cooler water replaces it. This pattern repeats itself. So the water always takes the fall leaving the balloon safe from becoming hot.
Make this an experiment The "experiment" above is actually a demonstration. To make it a real experiment try to answer questions you have by tests and doing your own experiments.
Would this work with a water balloon?
Could you replace the water with milk and have the same effect?