Capitalideasonline.com – 15 Feb 2006

“When everyone is thinking the same thing, no one is really thinking”

In a brilliant book “Financial Reckoning Day”, the authors, William Bonner and Addison Wiggin, write about the effects of mass participation in markets.

“War, like romance, needs a little madness. Leading a wild cavalry charge, the last thing you would want would be a group of intellectual kibitzers by your side. Instead, you would want real men… whose thoughts are as uncomplicated and blunt as a mace.

With such men behind you, you might have a chance of success­ of crashing into the enemy line and breaking it up. But any hesitation or doubts, and you would be finished.

Neither the god of war, nor the god of love, favors half measures. “Au­dacity,” said Danton to France’s generals in 1792. “We need audacity, more audacity and always audacity.”

The soldier, the politician, the football fan-all are particularly sus­ceptible to crowd thinking. Just observe fans at a football game; they stand and wildly cheer their teams as though the outcome of the game actually mattered to them. The idea of being on the winning team is itself a primi­tive form of group-think. It is not thinking at all, of course, but merely a brute sentiment that overtakes an entire group and causes its members to surrender their individual will to the will of the majority. Emboldened by the bodies pressed around them, people do the most amazing things.

A football game engages the crowd’s sentiments for a short time, and the fans are aware that it is only a game. They become much more fully engaged when the enterprise involves deeper, more abstract ambitions, such as making them all rich or masters-not just of the football field ­but of the entire world. It is important to realize that it is not rational thought that motivates them, but a primitive, simple-minded sentiment, often an inchoate desire that can barely be expressed in words. Nor can it be subject to rational challenge.

Le Bon writes:

“Notwithstanding all its progress, philosophy has been unable as yet to offer the masses any ideal that can charm them; but as they must have their illusions at all cost, they turn instinctively, as the insect seeks the light, to the rhetoricians who accord them what they want. Not truth, but error has always been the chief factor in the evolution of nations, and the reason why socialism is so powerful today is that it constitutes the last illusion that is still vital. In spite of all scientific demonstra­tions it continues on the increase. Its principal strength lies in the fact that it is championed by minds sufficiently ignorant of things as they are in reality to venture boldly to promise mankind happiness. The social illusion reigns today upon all the heaped up ruins of the past, and to it belongs the future. The masses have never thirsted after truth. They turn aside from evidence that is not to their taste, prefer­ring to deify error, if error seduce them. Whoever can supply them with illusions is easily their master; whoever attempts to destroy their illusions is always their victim.”

And here we offer a nuance. The crowd spirit that unifies an army or a football team is beneficial to its purpose. Without it, the cavalry dis­perses and cannot hope to accomplish its mission. Perhaps that is why na­ture has bred it into the human condition; like patriotism, perhaps it has its purpose.

While the mob thinking may be essential to certain kinds of competi­tive activities, it is worse than superfluous to others. “When everyone is thinking the same thing, no one is really thinking,” they say on Wall Street. Markets are unlike battlefields in that group-think rarely pays off. When people all expect to get rich by buying the same stock, it is the sellers who will get rich, not the buyers. The stock will quickly rise in price far beyond what a reasonable buyer should pay. Soon, those hold­ing the stock will have paid too much for it. And to whom will they sell? All the buyers have already bought.

Heading for the Exits

In economics, the problem is known as the Fallacy of Composition. In short, what may work for a single person may not work for a group. Looking back at the cavalry charge, an individual soldier could rein in his horse as he approached the enemy. . . letting his comrades make the initial contact with bayonets and musket balls. The cavalryman may in­crease his own chance of survival. But if all the horsemen did the same, they would almost certainly fail and probably be shot to bits as they hesi­tated before the enemy lines.

The paradox arises over and over again in economics and elsewhere. The owner of a business may be better off firing employees, cutting ex­penses, and improving the profit margin. But if all business owners sud­denly fired workers, consumer spending would fall. Soon, businesses would notice falling sales and profits.

Charles Kindleberger mentions the phenomenon of spectators stand­ing up at sporting events. When a few stand up, they get a better view. But when all stand up, the advantage disappears. A man may sell an over­priced stock and reap a tidy profit. But if other stockholders all attempt to do the same thing at the same time, the price will plummet. Instead of making a profit, they may all end up with a loss.

The great mass of citizens in a participatory system believe things so degraded by the crowd that they are mostly untrue. They may believe that the king has a “divine right” to tell them what to do, for example. . . or that the majority of their elected representatives does. Or, that they are racially superior, have a “manifest destiny,” or are in danger of being knocked down by a falling domino. In politics, lies, nonsense and foolish­ness run their own course-often sordid, sometimes pathetic and occa­sionally entertaining. But in markets, the outcome is always the same: maddened by a lie, participants run right into the Fallacy of Composition like a panicked mob into a theater exit. They may believe that they can all get rich by buying stocks, but getting rich is relative. Only a few can do it. Compared with most people in history, almost all American investors are rich already. But it is only the comparison to other living investors-their friends and neighbors-that matters to them. Can they all be richer than their friends and neighbors? It is no more possible than that all their chil­dren will have above-average intelligence.

At the end of 2002, for example, America’s baby boomers believed they could retire by selling their houses at appreciated prices. But to whom? The first to sell may do well, but what would happen to real estate prices if all 78 million boomers decided to sell at the same time?

As mass participation in markets increases, it brings in more and more capital and more and more people who do not know what they are doing. Prices rise, which confuses even many of the old-timers who should know better. Thus, the stage is set for the final, disappointing act. Ultimately, the common myth of the masses fails them for it is fanciful or physically impossible.

Le Bon’s “General Belief”

Essential to any society is what Le Bon calls a “General Belief” -a very large myth-that holds it together. Marxist Leninism-or at least lip service to it-held the Soviet Union together for seven decades, for ex­ample. Even in the1960s, when people began to realize that the creed was a loser, they stuck with it for another three decades for they had nothing to put in its place.

When a general belief is at its peak, participants do not recognize it as a belief at all. It seems self-evident and beyond question. After the fall of the Roman Empire, Europe lived under the general belief that God had organized things the way they were and intended for them to stay that way. And perhaps he did. But with the French Revolution, suddenly, the general belief changed.

The general belief in mass democratic consumerism was not fully formed at the end of the 18th century. People still saw it as an idea that they could dispose of if it did not suit the times. Between 1790 and 1820, as Gustave Le Bon tells us, the general belief in France switched three times: First it moved from its monarchist God-ordered vision to a revolutionary credo; then the revolutionaries extinguished themselves or fell under the spell of Napoleon’s Empire; and then, after the victo­rious Allies packed off Napoleon to St. Helena, it returned to a decrepit monarchy.

It would take another full century for the general belief in democratic consumerism to reach adulthood.”

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