The Delusions of Crowds – William J. Bernstein
The Delusions of Crowds by William J. Bernstein is a book about why people go mad in groups. It examines the history of mass movements, from religious cults to political revolutions, and looks at the ways in which powerful narratives can lead to irrational behavior.
The book examines how powerful stories, often propagated by charismatic leaders, lead to the adoption of dangerous and destructive ideas that can have long-term consequences. It then looks at the role of the media in amplifying these ideas, and how they can become self-perpetuating and lead to mass delusion.
The book provides readers with an understanding of how mass movements can arise and offers insights into how we can limit their destructive power.
An old classic is suddenly of great relevance again
The author has been writing about finance, economics, and technology for decades and came across the book Memoirs of Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, which chronicles financial, religious, fashion, and health manias.
The book is famous for its descriptions of financial bubbles and manias, including the Dutch tulip craze and the stock market manias in Paris and London in the 1700s.
While initially, the author did not find the book relevant to the relatively calm capital markets of the early 1990s, the vivid descriptions of societies going crazy over investing in internet stocks came alive a few years later, and those who had read Mackay’s book knew how it would end.
Narratives are fatal to reason
The key to human survival as a species is our large brain, which relies on language to communicate and cooperate. Neuroscientists believe narratives engage our brain’s limbic system and can distract us from the real world, leading to analytical trouble.
Even when labeled as fiction, narratives can blur the lines between fact and fiction, leading to a “Jaws effect” where people are influenced by compelling narratives and unable to perform simple analysis. To avoid this, it’s important to stick to numbers and facts when analyzing a subject.
Going deep in a story
The deeper the reader or listener enters into the story, the more they suspend disbelief, and the less attention they pay to whether it is, in reality, true or false.
This study, and many others like it, make this startling and cynical suggestion: If you want to analyze a subject, stick to the numbers and facts, and ignore the surrounding narrative. But if you want to convince others of something, forget the facts and data, and tell them the catchiest story you can.
We are like Apes
Humans are prone to mass delusions because of our evolutionary history. As we spread across the planet, our ability to adapt relied on accurate imitation of skills and knowledge.
This favored our proclivity to imitate, but in modern times, it can lead to maladaptive credulity and mass delusions.
The QAnon conspiracy theory is an example of this. Our Stone Age minds are operating in the Space Age, and we are prisoners of our evolutionary history.
How to spot a financial bubble
The recent excitement over GameStop, Robinhood, and Bitcoin exhibited four characteristic subplots of a bubble: financial speculation dominates social interactions, professionals quit jobs to speculate, skepticism is met with anger, and outlandish financial forecasts are made.
While the first movers in a bubble can prosper, the vast majority of those who follow usually lose their shirts. However, bubbles usually benefit society at large. The example of Global Crossing shows how a stock bubble can impoverish investors but still benefit society by endowing the planet with much of its current bandwidth.
“It’s sad but true that a good story will often trump the most ironclad fact.”
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