Of crowds and irrational behaviour

S Adikesavan | Updated on April 18, 2021

Title: The Delusions of Crowds: Why people go mad in groups Author: William J Bernstein Publisher: Black Cat Price: ₹2,526

The book unravels how people rationalise facts to fit them into their perceptions

Neuroscientists have uncovered the physiological basis for two of the most fundamental responses driving human behaviour, especially when it comes to behavioural economics: greed and fear. These are the two impulses which drive money and the markets, and even religion.

According to science, the limbic system which divides the brain into the right and left hemispheres gets fired by outside stimuli that get transferred through the temples on the forehead and behind the eyes.

But the analysis in the brain very rarely follows rationality. It follows rather, our own “rationalisation” of the reality and not the reality per se.

This difference will be profound if only we were to analyse our responses. The brain is more receptive to stories or narratives than to figures and cold data and, therefore, a tale is more likely to be accepted and acted upon than a table of figures.

In rationalist terms the latter should guide us more but the fact is just the opposite.

In a finely written new book The Delusion of Crowds, William J Bernstein, author of earlier titles like Rational Expectations and The Intelligent Asset Allocator, discusses the reasons for crowd behaviour or herd mentality in a logical analysis of various events in recent history.

Tables vs tales

He derives no definitive conclusions, but after reading the book one realises the need to focus more on data than deductions, tables than tales, statistics than stories.

The ideal output is when we can balance both inside our brain/mind and then arrive at conclusions.

Most often but, crowds of which we are all a part of — whether in an office conference room or an economic/political/religious congregation — tend to absorb narratives which lead to unintended irrational behaviour or rationalised behaviour which suits our intuition.

Herd delusions

This can be called herd mentality but the instances that Bernstein cites have repeated themselves in history so often that it is not just a “mentality” but delusions that crowds suffer from.

Otherwise sane people tend to go mad in groups. This happens with religion as indeed with the stock markets.

Booms and busts over the last four centuries and religious waves whether benign or malignant have all resulted from this trait of human behaviour.

The theme is not exclusive to the 21st century. In 1841, Scotsman Charles Mackey authored Memoirs of Extraordinary Popular Delusions which narrated multiple episodes of mass mania, related to religion or money. It has been popular reading on this subject, ever since.

Bernstein states in the Prelude that “people do not deploy the powerful human intellect to dispassionately analyse the world but rather to rationalise how the facts conform to their emotionally derived perceptions”.

Irrational past

It is stated that Mackey himself was a victim to the railroad stock market mania in Britain in 1843, when investors underwrote growth in rail lines from 2,000 miles to 5,000 in 1848 and thousands of more miles, which were planned but never built. The shares of thousands of investors went bust. Mackey was one of them!. Those who are familiar with the stock market would have heard of the Dutch tulip mania of the 1630s (when investors bet high on the prices of tulip flower bulbs) and the twin stock market bubbles in Paris and London in 1719-20.

Busts and crowds

The Dotcom bust at the beginning of the century and the meltdown in 2008 are recent examples of the grand delusions of crowd behaviour. The brightest and the best minds lost money even when they were seemingly acting on mathematical models built on rational principles. The line between the rational and the rationalised is indeed quite thin and what is amazing is that this trend tends to repeat itself.

The religious madness of the Crusades and contemporary trends in Islam (and Hinduism, at a political level) prove the theory that “rationality” of behaviour and thinking is, as the author puts it, “a fragile lid perilously balanced on the bubbling cauldron of artifice and self-delusion”.

The press (media) and politicians are none too minor players in this drama and they fuel the mania to its logical conclusion. Technology and the availability of cheap money are factors which have propelled these trends in recent times. Fiat money (where currency is printed without any backup reserve) makes it extremely expedient for bubbles to form and flourish. Before the inevitable bust comes.

It is interesting to note that the more the “group” or the “crowds” interact, the less rational the individuals in these become. Frederich Nietzsche said: “Madness (not the physiological) is rare in the individual — but with groups, parties, peoples and ages it is the rule”.

Accordingly, the accuracy of a group’s aggregate judgment lies in the group not behaving like a crowd.

At a time when cryptocurrency manias and the irrational exuberances (of Greenspan fame and lately used by our own RBI Governor Shaktikanta Das) in the markets are looking like Macbethian ambitions that “fall on the other”, the relevance of the mass delusions will continue to dominate our ex-post analysis.

The reviewer is a Chief General Manager with SBI. Views are personal.


William J. Bernstein is a neurologist, financial theorist, and historian whose books include A Splendid Exchange, Masters of the Word, The Birth of Plenty, and The Four Pillars of Investing. He is the co-founder of the investment management firm Efficient Frontier Advisors, and has written for publications including the Wall Street Journal and Money magazine. He was the winner of the 2017 James R Vertin Award from CFA Institute. He lives in Oregon.

Published on April 18, 2021

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